While I was studying business cycles it came to my mind that the inventory to sales ratio represent expectations about economic activity. For example, when an economy is in a recessionary trough inventories may become depleted more quickly once sales growth begins to anticipate the expansion, meaning that the ratio will be lower and that a recovery for the economy is coming. Wouldn’t this be a leading indicator instead of a lagging one?
Please correct me if I’m wrong or I misunderstanding the concept,
When the economy is at the peak, although sales may be slowing down, the manufacturer will have to keep producing to utilize their capacity, thus higher inventory (lags) => leading to a higher than average inventory/sales ratio
When the economy is near the bottom, sales is starting to pick up, but manufacturer is reducing their inventory (lags) => leading to a lower than average inventory/sales ratio
Given the sales number is quicker to react than inventory, a lower inventory to sales ratio is a result of higher sales, coincident with a recovery phase.