Trend breaks in US inventory to sales ratios

This paper documents econometrically that US Inventory to Sales Ratios have time trends and that there have been significant breaks in these time trends at both the aggregate and industry level. Using techniques developed by Bai (Rev. Econ. Stat. (1997) 551) and by Bai and Perron (Econometrica 66 (1) (1998) 47), we simultaneously estimate the time trend parameters and the dates of statistically significant breaks in those trends. Using data from 1967 through 2001, it is estimated that aggregate Manufacturing and Trade Inventory to Sales ratio trended upwards at a 0.76%/year rate before 1985 Q3 and has trended downwards at a 1.29%/year rate since then. Downtrends are estimated to have begun in Manufacturing ratios in 1983, Wholesalers in 1985, and Retailers in 1990. Before the mid-1990s nearly all the reductions in ratios occurred in industries carrying durable goods. Examination of the timing and possible explanations of trend breaks for the 20 two-digit manufacturing industries suggests that breaks are much more likely to have occurred in recessions and may be related to changes in the variance of the industry's sales growth rate.