Answering this question is important for determining what is likely to happen to inventory building for the rest of the year. How do we begin to gauge whether businesses wanted to rebuild inventories in the second quarter? One way is to look at the ratio of inventories to sales.
In the nonfarm sector, this ratio has fallen nearly 25 percent in the past fifteen years, from 2.59 months’ supply to 1.97 months’ supply. Most likely this secular decline represents improvements in inventory management, possibly related to better technology. In 2003, the inventory-sales ratio fell especially sharply, dropping from 2.02 to 1.94, or about 4 percent.