Wholesalers boost inventories by most since May
WASHINGTON – Wholesale companies increased their stockpiles of autos, paper, and other goods in October by the most in five months, a sign they expect consumer demand to rise.
The Commerce Department said Thursday that wholesale inventories grew 1.6 percent, the most since May. Rising stockpiles of nondurable goods, such as paper and petroleum, drove the increase. September's figure was also revised to show that inventories were unchanged, up from last month's estimate of a 0.1 percent decline.
Sales at the wholesale level increased 0.9 percent, after a 0.3 percent increase in September.
When companies build up their inventories, it usually signals that they expect more sales. And the extra factory production needed to increase stockpiles boosts economic output.
Overall inventories shrank in the July-September quarter, shaving more than 1.5 percentage points off economic growth. Companies likely cut back their stockpiles out of concern over future economic growth.
Companies are now rebuilding their stockpiles as the economy is showing signs of improvement. In addition to the wholesale gains, manufacturers increased their inventories 0.9 percent in October, the government said on Monday.
Ellen Zentner, an economist at Nomura Securities, said the report "confirms the big rebound in inventory building that we expected to take place this quarter." That could add as much as 1.5 percentage points to growth in the October-December period, she said.
Rising inventories are a big reason economists expect growth will improve in the fourth quarter. Most expect the economy to expand by an annual rate of about 3 percent, up from 2 percent in the July-September quarter.
Over the past two years, companies have rebuilt their inventories after cutting them to the bone in the recession. That restocking is a big reason the manufacturing sector has been one of the strongest industries in the recovery.
Still, wholesale inventories are lean, compared to sales. That suggests companies are keeping inventories roughly in line with sales. If inventories grow much faster than sales for an extended period, it can force companies to cut back orders.
In October, the ratio of inventories to sales was 1.16, up slightly from September's 1.15. That means it would take 1.16 months to exhaust the current level of stockpiles. That's close to the record low of 1.13 hit in March.
There are some signs that the economy and job market are improving modestly. The unemployment rate fell to 8.6 percent in November, the government said last week, down from 9 percent the previous month. That's the lowest rate in two and a half years.
Still, about half the decline stemmed from a drop in the size of the work force.
Manufacturing firms are boosting output, a survey last week showed, and retailers have reported a strong start to the holiday shopping season.
But the economy is still vulnerable to a shock from overseas. European leaders are struggling to contain a two-year old debt crisis and the 17 nations that use the euro are likely already in recession, economists say. That could slow U.S. exports and drag on U.S. growth next year.