Oversupply

Oversupply

Reports about inventory levels are inevitably hidden in just about every news story on the economy. That's because inventory levels are an overall indicator of the health of businesses, and experts postulate that inventory is also closely correlated with the severity of recessions. While the proper amount varies from industry to industry, too much inventory is generally seen as a sign that businesses are having trouble, because, in simple terms, no one is buying what companies are selling.

Over time, thanks in part to sophisticated technology that helps businesses keep better tabs on what they have in stock, recessions have become less severe. "In previous economic cycles we got caught up in inventory recessions," says Norbert J. Ore, chairman of the Institute for Supply Management's manufacturing business survey committee in Tempe, Ariz. "Over the course of a lot of years, we have gotten much better at managing supply lines."

So what do inventory levels say about the current situation? We're in the midst of a slowdown. The ISM's monthly business report shows that the economy continues to expand, but that manufacturers' inventories have become smaller nationwide as they adjust to dropping demand. The report also shows that manufacturers' customers—retailers—have inventory levels that are too high. The customer inventory index, which assigns a number between 1 and 100, was 54.5 for August, up from 47 in July. (Anything over 50 indicates a weakening economy.) What's more, manufacturers' inventory continues to outpace new orders, which means they'll have to pare back eventually.

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