Sales are ultimately driven by demand and the current economic environment is one best described as lacking in demand. This was clear in another weak report from the NFIB and small businesses this morning:
“With expected business conditions and expected real sales delivering poor readings, it is not surprising that inventory demand remains weak. The pace of inventory reduction slowed a bit, with a net negative 7 percent of all owners reporting growth in inventories (seasonally adjusted), a 1 point improvement.
The net percent of all owners (seasonally adjusted) reporting higher nominal sales over the past 3 months lost 7 points, falling to negative 5 percent, this after reaching a 5 year high of a net 4 percent in April. Twenty-three percent still cite weak sales as their top business problem, historically high, but down from the record 33 percent reading in December, 2010. The net percent of owners expecting higher real sales lost 5 points, falling to a net negative 3 percent of all owners (seasonally adjusted), producing a 4 month decline of 15 percentage points.
…Expectations for improvements in sales and business conditions faded, so no reason to hire additional workers or buy new inventory.”
It’s not a great report. But this sales figure really pops out. Businesses base most of their decisions on the top line. It is the lifeblood of a company. You produce goods and services, you try to sell them and if the demand is there then you bottom line swells you hire more people, you produce more goods and services, etc etc. But if there’s no demand then there’s no goods and services to sell. And the current environment is one where the demand is just flat out weak.
Mr. Roche is the Founder and Chief Investment Officer of Discipline Funds.Discipline Funds is a low fee financial advisory firm with a focus on helping people be more disciplined with their finances.
He is also the author of Pragmatic Capitalism: What Every Investor Needs to Understand About Money and Finance, Understanding the Modern Monetary System and Understanding Modern Portfolio Construction.