Business inventories unexpectedly rose 0.2% in October, the U.S. Commerce Department announced Friday, indicating a slight reversal in businesses' cautious stance towards the economy.

A Bloomberg News economists survey had expected inventories to decline 0.2% in October after falling a revised 0.3% in September, less than the previously released 0.4% decline; business inventories also fell 1.5% in August, and 1.0% in July. Further, despite October's unexpected rise, inventories have fallen 12.8% in the past year.

Separately, import prices increased 1.7% in November, the U.S. Labor Department announced Friday, led by a 7.3% surge in fuel prices. Import prices rose 0.8% in October. Meanwhile, November export prices rose 0.8%, following a an 0.2% rise in October. A Bloomberg News survey had expected November import and export prices to increase by 0.7% and 0.3%, respectively.

Still, neither imports nor exports have displayed pricing power during the past 12 months -- reflecting the slack demand conditions stemming from the recession. During that period import prices have plunged 5.7% and export prices have fallen 3.4%.

Businesses Adjust To "New Era"

Alongside the inventory increase, business sales also rose 1.1% in October, after falling 0.3% in September; sales rose 1.0% in August and 0.1% in July. However, the impact of the recession can still be seen in the year-over-year figure: Business sales have declined 12.6% since October 2008.

Further, with sales rising amid tight inventories, the inventory-to-sales ratio fell to 1.30 in October from 1.32 in September. The ratio, an indicator of demand, was at 1.43 in April, and at 1.37 a year ago, in October 2008.

The ratio's nearly year-long decline reflects the 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 new "frugal consumer" era.

Analysis

Despite the rise in inventories in October, the year-long inventory decline suggests that businesses have trimmed inventories too much -- that is, they've overreacted to having products they couldn't sell and cut inventories too far --which will likely boost manufacturing and wholesale commercial activity in the quarters ahead. What's more, this will also result in an increase in jobs at the manufacturing level. True, manufacturers are now more efficient, but any protracted increase in demand over one year will have businesses scrambling to restock shelves.

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