A broadly based agreement exists among students of economic conditions that inventories play an important role in the periodic economic fluctuations from boom to bust and back again to boom. That finding by economists should not be praised as an extraordinary piece of brain work, however, because every manufacturer and trader, plus various functionaries, such as business managers and purchasing agents, and even sales clerks, can independently come to the same conclusion by observing the production, sales, and inventory records. In fact, the inventory data are collected with the help of those production and sales agents. The economists may have differences of opinion about how to best use and evaluate the inventory data so collected. This chapter, in effect, is concerned with the use of various inventory data for evaluation of current and future economic conditions.

Inventory data as a business cycle indicator

The application of inventory data may create misunderstanding when one does not carefully distinguish between flow and stock concepts relating to inventories. The flows and stocks have different timing sequences. To begin with, the flows are equivalent to changes and lead the cyclical timing in the stocks or aggregates (also referred to as levels). The accumulation of inventory stock has normally slowed down by the time the economic activity reaches a peak because the inventory flow (called inventory investment or buildup) has reached its peak some time prior to the cyclical peak and has been slowing down from that time point on.