Business Inventories Unexpectedly Dip In December as Sales Rise

U.S. business inventories unexpectedly dipped 0.2% in December, the U.S. Commerce Department announced Friday. The decline was primarily due to an increase in sales, a bullish sign for economic recovery.

The November inventory gain was revised to an 0.5% increase, up from the previously-released 0.4% rise. Business inventories rose 0.8% in October.

Economists surveyed by Bloomberg News had expected inventories to rise 0.2% in December. Prior to the two-month uptrend in October and November, inventories had fallen for 13 straight months.Sales Jump 0.9%

In December, sales rose 0.9%. December sales are up 4.7% from a year ago. Although investors should keep in mind that current sales increases stems from a low base as a result of the pronounced recession, the year-over-year sales increase is still a substantial improvement from the double-digit, year-over-year declines recorded during the depths of the recession.

With sales rising faster than inventories, the inventory-to-sales ratio fell again, to 1.26 in December from 1.27 in November. The ratio, an indicator of demand, was at 1.43 in April 2009 and at 1.46 a year ago, in December 2008.

The unusually large draw-down in inventories in the previous year should help boost the economy. In the initial stage of the recovery businesses will need to restock shelves to avoid being product-short as the expansion continues, and those orders for new goods will increase manufacturing activity and boost GDP.

Economic Analysis
The inventory dip in December should be temporary. Most economists expect U.S. corporations to replenish inventories in the months ahead, at least through the end of the second quarter, and this will be the key factor propelling U.S. GDP growth. Over time, however, organic demand will have to take over to sustain the U.S. economic expansion.

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