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Wholesale Companies Cut Inventories Amid Sales Bump

Tue, 11/08/2011 - 7:00pm
Christopher S. Rugaber, AP Economics Writer

WASHINGTON (AP) -- Wholesale businesses reduced their stockpiles in September for the first time in nearly two years, while their sales rose.

Inventories at the wholesale level fell 0.1 percent, the Commerce Department said Wednesday. It was the first decline since December 2009. The drop was largely because companies cut their stockpiles of nondurable goods, such as agricultural products, petroleum, and clothing. Inventories of durable goods, such as autos, furniture and machinery, rose.

A decline in stockpiles suggests wholesalers worried in September that future sales could slow. Europe's debt crisis intensified that month, and the stock market plunged.

Sales by wholesale companies rose 0.5 percent, half the increase in August but more than July.

Rising wholesale sales keep inventories from getting too high. If companies increase their stockpiles too much, that could force them to cut back on future orders.

Over the past two years, companies have rebuilt their stockpiles after cutting them to the bone during the recession. That restocking is a big reason the manufacturing sector has been one of the strongest industries in the recovery.

Inventory building slowed over the summer, which lowered economic growth in the July-September period by more than a full percentage point. The economy expanded at an annual rate of 2.5 percent in the third quarter.

Reduced inventories can be a good sign if demand keeps rising because manufacturers must boost stockpiles if they want to meet that demand. For that reason, some economists expect inventories will contribute to economic growth in the October-December quarter, rather than subtract.

But others say the report could be a sign that businesses are worried about demand.

"If you think demand is going to remain weak, there's no reason to build stockpiles," said Jacob Oubina, an economist at RBC Capital Markets.

Consumers increased their spending in the July-September quarter. Economists worry the gains can't be sustained because consumer spending rose even while incomes were largely stagnant. Consumers dipped into their savings to support the extra spending.

Without more jobs and pay raises, consumers are likely to cut back on spending.

The economy is growing, but not fast enough to significantly reduce the unemployment rate, which dipped to 9 percent in October from 9.1 percent the previous month. Growth would have to accelerate to 4.5 percent for a full year to reduce unemployment by a full percentage point, economists say.

Wholesale inventories are one of several categories of inventories the government tracks. The other two aremanufacturing and retail stockpiles. Those categories will be included in a business inventories report issued later this month.

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