U.S. business inventories plunge record 1.5 percent
Filed under: Economy
The 1.5 percent August inventory decline ties a 17-year record dip. Business inventories also declined 1.5 percent in December 2008 and in October 2001.
Economists surveyed by Bloomberg News had expected inventories to decline 0.9 percent in August. Inventories fell a revised 1.0 percent in July and dropped 1.4 percent in June. Further, inventories have fallen 11.8 percent in the past year, and have declined for 12 straight months. However, these leaner inventories should boost GDP when businesses re-stock shelves during the recovery, most economists agree.
In August, retail inventories fell 2.3 percent and are now 15.1 percent lower than a year ago. Also, auto inventories sank 7.9 percent in August -- a statistic that reflects sales activity stemming from the federal government's recently-completed cash-for-clunkers program.
In addition, in the past 12 months manufacturing inventories have plummeted 11.4 percent.
Meanwhile, sales rose 1.0 percent in August, after rising 0.1 percent in July and 0.9 percent in June. Sales have declined 15.0 percent in the past 12 months.
Businesses: adjusting to new era
Further, in August the inventory-to-sales ratio declined again -- a trend that reflects both typical, cyclical caution that one normally sees during economic troughs, and most likely an awareness by businesses that consumer spending during the next expansion may not return to previous growth rates, due to the "frugal consumer" era. The ratio, an indicator of demand, fell to 1.33 in August from 1.36 in July and 1.38 in June. Roughly a year ago, in August 2008, the ratio was 1.30.
In general, economists prefer to see business inventories decline during a recession, as it has historically indicated that businesses are bringing inventories back in line with reduced demand, taking excess supply out of the system. That drawdown has historically set the stage for both production increases and some job additions, as the economic recovery progresses.
Economic Analysis: Although August's 1.5 percent drop in inventories tied the one-month decline record, the overriding trend remains the same and is the key item in the August report: leaner inventories amid a modest uptick in sales. Hence, most likely, the sharp, prolonged decline in business inventories will boost U.S. GDP in the quarters ahead once businesses start to replenish those inventories as the recovery progresses. In fact, some sectors could be "product-short" if the recovery intensifies. If the latter occurs, that would suggest that businesses pared-back inventories too much. But given the depth and length of the recession, it's easy to see how businesses could make that mistake: given an uncertain recovery timetable, many did not want to be in the unenviable -- and costly -- position of having products that no one wanted to buy amid a struggle economy weighed-down by high unemployment.
In August, retail inventories fell 2.3 percent and are now 15.1 percent lower than a year ago. Also, auto inventories sank 7.9 percent in August -- a statistic that reflects sales activity stemming from the federal government's recently-completed cash-for-clunkers program.
In addition, in the past 12 months manufacturing inventories have plummeted 11.4 percent.
Meanwhile, sales rose 1.0 percent in August, after rising 0.1 percent in July and 0.9 percent in June. Sales have declined 15.0 percent in the past 12 months.
Businesses: adjusting to new era
Further, in August the inventory-to-sales ratio declined again -- a trend that reflects both typical, cyclical caution that one normally sees during economic troughs, and most likely an awareness by businesses that consumer spending during the next expansion may not return to previous growth rates, due to the "frugal consumer" era. The ratio, an indicator of demand, fell to 1.33 in August from 1.36 in July and 1.38 in June. Roughly a year ago, in August 2008, the ratio was 1.30.
In general, economists prefer to see business inventories decline during a recession, as it has historically indicated that businesses are bringing inventories back in line with reduced demand, taking excess supply out of the system. That drawdown has historically set the stage for both production increases and some job additions, as the economic recovery progresses.
Economic Analysis: Although August's 1.5 percent drop in inventories tied the one-month decline record, the overriding trend remains the same and is the key item in the August report: leaner inventories amid a modest uptick in sales. Hence, most likely, the sharp, prolonged decline in business inventories will boost U.S. GDP in the quarters ahead once businesses start to replenish those inventories as the recovery progresses. In fact, some sectors could be "product-short" if the recovery intensifies. If the latter occurs, that would suggest that businesses pared-back inventories too much. But given the depth and length of the recession, it's easy to see how businesses could make that mistake: given an uncertain recovery timetable, many did not want to be in the unenviable -- and costly -- position of having products that no one wanted to buy amid a struggle economy weighed-down by high unemployment.
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Reader Comments (Page 1 of 1)
10-14-2009 @ 3:11PM
Iridium said...
Inventories are even still too high after all of the reductions. The problem is that stores are just too large. Walmart and target need a certain amount of inventory just to stock thier shelves.
They don't want to have bare shelves becuase that will not look good to customers. Investors will also punish them heavily if total sales do not meet expecations. SO they fully stock shelves and then discount massively when the inventory doesn't sell. Still reduced margins on sold inventory is better than no margin on invetory that isn't there. As long as the inventory isn't sold at a loss there is still profit. Yet not as high as previous years.
September sales were only higher due to a late Labor Day and massive discounting. Haloween inventories were put out the second week of September. They are still almost at the same levels. People aren't buying candy this year when they can barely afford to pay the mortgage. It is hysterical to walk into Target and see 3 for $5 sales on bags of candy with two weeks left until Haloween. Almost as hysterical as seeing $200 dorm fridges on sale for $50 the second week of August.
At Lowes and Home depot they already have thier entire holiday sections up complete with fake trees. In fact they went up the first weekend of October.
I guess Thanksgiving isn't happening this year.
Someday you need to take a walk through the real world Mr. Lazzaro. I know it is tough to relate to the other 90% of this country. Tough to understand how it can be hard to choose between a $5 bag of candy for trick or treaters or paying your mortgage.
Maybe it is just tough to understand how you and all of your liberal friends can be so wrong about the economy. Or how the criminal investment banks can have it so wrong. The business you are invloved with is destroying the lives of a few hundred million people.
Yes we still have around 80% of working people employed but at least half of that or more are struggling to make ends meet. Many are still buying toys and video games for thier kids but not as much as they did before. ANY PARENT WOULD WANT THIER KIDS CHILDHOOD TO BE HAPPY AND THAT REQUIRES SACRIFICE. The sacrifice has been purchasing less for themselves. Have you seen the numbers in the golf market lately? Or any other recreational activity that requires money. ALL DOWN BY GREATER THAN 50%.
Real people working on the ground have told me that sales at big box stores are down anywhere from 25% to 50%. Earnings are only being kept up by cutting costs and squeezing suppliers. Given the choice of going bankrupt or taking 10% off wholesale, the supplier is going to take 10% less. Most of these companies are not publicly traded. Their loss is a loss to the few employees they have.
I don't think the disconnect has ever been greater the gap ever wider. At least during the Great Depression the mainstream said it was bad. Today they say, THE DOW JUST BROKE 10,000 THE RECOVERY IS HERE AND IT IS GOING TO BE GREATER AND AT A FASTER PACE THAN WE ANTICIPATED!!!
Really??? The equity market and the books of the privelaged investor have never seen this kind of recovery. The problem is that this is all paper wealth with no substance to back it. It is all based on the idea that revenues will somehow match the expectations even though there is no way this can happen because INVENTORIES HAVE FALLEN SO FAR BELOW THE LEVEL THAT SUPPORTED THOSE VALUATIONS THAT EVEN 100% SELLTHROUGH CAN'T PRODUCE PROFIT TO MATCH THE EXPECTATION OF SHARE PRICES!!!
How about that fact to chew on. Many stocks are flirting with 52 week highs based on inventories that are 12% lower than the same period. HOW ARE YOU GOING TO MATCH YEAR AGO SALES PERFORMANCE WHEN BY THE NATURE OF DECLINING INVENTORIES IT IS IMPOSSIBLE TO CREATE THE SAME GROSS REVENUE??? oops I think I just popped the bubble. Look at the market, corporations are beating earnings but on massively declining revenues. How much further can they cut to keep beating earnings reports. Maybe the street just set expecations so low on purpose.
The last time the privelaged were this arrogant it didn't end up so good for them. The tipping point to the guillotine isn't very far away.
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