Small Inventory Gain, Import/Export Price Declines Hint at Slowing Recovery Two business reports released Wednesday provided additional evidence that the U.S. economic recovery probably slowed somewhat in the second quarter: Business inventories in May rose just 0.1% -- their smallest gain this year -- and import and export prices fell in June.

Inventories did rise for the fourth straight month, but the gain was below the Bloomberg survey's consensus estimate of 0.2%. The small increase suggests businesses may becoming more cautious, concerned that demand may slow in the quarters ahead. Inventories rose 0.4% in April.

Meanwhile, sales fell 0.9% in May, as all three sales categories -- manufacturing, retail, and merchant wholesale -- declined.

Nevertheless, sales are still up 11.8% from May 2009, although that rise loses some of its luster when one remembers that it's in comparison to the weak numbers from the depths of the recession.

Further, with inventories rising faster than sales, the inventory-to-sales ratio rose slightly, to 1.24 in May from 1.23 in April, which means companies had a 1.24-month supply of goods in stock at the May sales pace. The ratio, an indicator of demand, was at 1.43 in April 2009.

In general, economists prefer to see business inventories rise during an expansion, as it has historically indicated that businesses are confident that increased demand will take the products out of their warehouses and off their shelves. Moreover, inventory building and replenishing also leads to job creation, as firms increase production.

June Import, Export Prices May Signal Deflation

Separately, import and export prices in June provided more evidence for those concerned about deflation -- a protracted decline in prices and wages.

The import price index plummeted 1.3%, while the export price index dipped 0.2%, the U.S. Labor Department announced Wednesday.

Import price declines were led by a 4% drop in fuel prices, but nonenergy components of the index fell as well, with a 0.3% drop in capital goods prices and an 0.4% decline in finished consumer goods prices.

On the export side, capital goods prices declined 0.4% while finished consumer goods prices plunged 0.6%.

The price declines suggest that commercial operations lack pricing power -- something one would expect to see during tepid (or worse) economic growth conditions. The June import/export data also suggest that producer and consumer prices have moderated: Both the producer price index and consumer price index are expected to show declines of 0.1% when June data are released later this week.

Ambivalent Numbers in the Bull Vs. Bear Battle


Taken together, the latest business inventory and import/export reports will serve to provide fodder for both sides of the debate between the economic bulls and bears.

From a bullish perspective, it can be argued that better-than-expected corporate earnings, such as Intel's (INTC) June quarter report, adequate exports, and a rebound in manufacturing, are enough to sustain the U.S. economic expansion.

Conversely, the bearish view argues that a slowing European economy stemming from the continent's government debt crisis will combine with sub-par U.S. job growth and tepid consumer sentiment to slow the expansion in the second half of 2010, possibly tipping the economy into a double-dip recession.

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