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The trend private non-farm inventories to total sales ratio generally declined between the March quarter 1991 and the June quarter 1998, when it reached a low of 0.849. The ratio then increased slightly to September quarter 1999, after which it began to fall again. In June quarter 2002 the ratio was at its lowest ever level of 0.809. The trend decrease in the non-farm inventories to total sales ratio is generally attributed to the adoption by businesses of more cost-effective inventory management systems.
Private non-farm inventories include goods intended for sale (either of own production or purchased for resale), work in progress, raw materials and stores of all private non-farm businesses. All private non-farm industries are covered, with the major inventory-holding industries being manufacturing, wholesale trade, retail trade and mining.
Private non-farm inventory levels may fluctuate significantly with changes in economic activity. The periodic fluctuations in the level of non-farm inventories are often referred to as the 'inventories cycle'.
The private non-farm inventories to total sales ratio compares the value of inventories held by private sector businesses, other than those engaged in agriculture, with the value of total sales of goods in a given period of time. Sales are defined as household final consumption expenditure on goods plus private and public gross fixed capital formation on dwellings, other buildings and structures, and machinery and equipment plus exports of goods.
The private non-farm inventories to total sales ratio can be an important indicator of future business intentions. An increase in the ratio may indicate that businesses have decided to build up inventories in anticipation of increased sales. On the other hand, the ratio may fall as businesses decide to run down their inventories if sales are expected to weaken.
Of course, at times there will also be some unplanned inventory build-ups or run-downs. If sales are higher than expected, inventory levels will be less than planned. Conversely, if sales are lower than anticipated, there will be an increase in inventory holdings in the short term. In this way, inventories act as the buffer between changes in demand and the supply of goods available to meet that demand.
Australian National Accounts : National Income, Expenditure and Product (5206.0)
Contains broad measures of inventories, including the inventories to total sales ratio in seasonally adjusted and trend terms.