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‘Modest Restocking’ May Boost U.S. Out of Recession

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September 11, 2009 by   Leave a Comment

Businesses reduced inventories at the wholesale level for a record 11th consecutive month in July, although sales rose by the largest amount in more than a year, sparking hope for better days ahead, the Associated Press reported today (Sept. 11).

The report mirrors recent developments in the RV industry, whose forecaster Richard Curtin also is reporting a gradual upturn following a two-year decline.

Economists expect that some modest restocking triggered by the higher sales helped boost the economy out of recession in the current quarter. Some analysts said the economy could rebound to growth approaching 4%, after it fell at a 1% rate in the April-June period.

The Commerce Department reported today that wholesale inventories declined 1.4% in July, more than the 1% drop economists expected. That decline followed a 2.1% fall in June, worse than the 1.7% drop originally reported.

Sales at the wholesale level rose 0.5%  in July, the fourth consecutive increase and the biggest gain since a 2% jump in June 2008.

Jennifer Lee, an economist at BMO Capital Markets, said the rebound in sales was encouraging and should help convince businesses to restock their shelves and back lots. That swing in inventories should play a major factor in boosting the economy out of a recession in the current quarter.

The overall economy, as measured by the gross domestic product, will grow at a 3.8% annual rate in the current July-September period, Lee forecast. The economy posted declines of 5.4% and 6.4% in the fourth and first quarters respectively, the worst performance in a half-century.

“For the second half of this year, things are looking better than they were a few months ago with activity being helped by stimulus efforts such as the Cash for Clunkers program,” Lee said.

Economists are worried, however, that the economy will slip back to weaker growth beginning next year as the impact of various stimulus programs dims and the unemployment rate keeps rising, depressing consumer incomes and their willingness to spend.

Still, more positive news came Friday when consumer confidence, as measured by the University of Michigan-Reuters survey, rose more than expected to a reading of 70.2 in early September, compared with 65.7 in August.

“With hope comes more spending and with more spending comes more production,” Lee said.

Wholesale inventories are goods held by distributors who generally buy from manufacturers and sell to retailers. They make up about 25 percent of all business stockpiles. Factories hold another third of inventories and retailers hold the rest.

The July inventory drop left the inventory to sales ratio at 1.23, meaning it would take 1.23 months to exhaust stockpiles. That was slightly lower than the 1.25 ratio in June, but still above the 1.13 inventory to sales ratio of a year ago.

The rise in sales at the wholesale level come amid continued weakness at many retail establishments, which reported lackluster back-to-school sales in August. However, automakers saw a spurt in activity from the government’s clunkers program.

Ford Motor Co., Toyota Motor Corp. and Honda Motor Co. all reported increased sales in August as consumer snapped up their fuel-efficient models. But rivals Chrysler Group LLC and General Motors Co., which have just emerged from bankruptcy protection, saw their sales fall for the month.

The 11th straight drop in wholesale inventories is the longest stretch on records that date to 1992, surpassing the old mark of nine straight decreases from June 2001 to February 2002, a period that covered the last recession.

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