There are frequent attempts to predict economic trends and stock price turning points by analyzing inventory flow. However, this approach faces several challenges. Can inventory data truly provide accurate forecasts of the economy and stock prices? Let's explore the reliability of predicting economic trends through inventory analysis.
The Role and Issues of Inventory
Changes in Inventory and Corporate Strategy
As companies calculate their sales, the more unsold inventory they have, the lower their cost of goods sold, which increases profits. These inventories are one of the categories that can easily be inflated when a company's performance is poor. In manufacturing, where the proportion of inventory is high, profits can vary significantly depending on the inventory measurement method. This shows that inventory can appear very differently depending on calculation methods and company characteristics.
The Reliability Problem of Inventory
The aggregate "inventory" number, combining all companies' inventories, is unreliable. Companies' inventory values can vary significantly based on cost measurement methods, price fluctuations, and inventory characteristics. For example, inventories in a steel company versus a fashion company have entirely different meanings. A steel company can hold inventory and sell it when prices rise, but a fashion company may find it difficult to dispose of unsold inventory after trends change.
Predicting Economic and Stock Price Trends through Inventory
The Relationship between Market Trends and Inventory
During a stock market recovery, companies' sales increase but production can't keep up, leading to a decrease in inventory. During a boom, both sales and production increase, resulting in higher inventory. In a recession, sales decrease slowly while production continues, leading to increased inventory. During a depression, both sales and production decrease, causing inventory to drop. While these trends aim to predict stock market turning points, solely relying on inventory to forecast the overall economy is problematic.
The Limits of Using Inventory for Economic Predictions
Efforts to use inventory as an analytical indicator have limitations. There are various variables such as company characteristics, market conditions, and production methods. For example, in industries with high fixed costs like semiconductors, chemicals, and automobiles, companies may increase inventory to reduce production costs during a boom. Conversely, companies in industries with high inventory holding costs aim to quickly dispose of inventory during a boom.
Different Inventory Characteristics and Economic Predictions
Various Types of Inventory
Inventory does not only refer to goods in storage. It includes goods in transit under delivery terms, consigned goods at dealerships, and goods used for promotional purposes. Predicting the economy based on a single "inventory" number that encompasses such diverse types of inventory is challenging.
Strategic Inventory Accumulation and Economic Predictions
Some companies strategically accumulate inventory in anticipation of increased sales, while others dispose of inventory due to halted production. Predicting the economy and stock prices solely based on inventory flow without considering these diverse strategies and circumstances is incomplete.
Conclusion
Attempts to predict economic and stock price turning points through inventory analysis are intriguing, but simple approaches that do not account for various factors and company characteristics have limitations. Accurate predictions of the economy and stock markets require more complex and diverse analyses.
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