It’s up for interpretation whether this is good or bad news. Businesses slashed their inventories for the 10th straight month in June and by a greater margin than expected ― -1.1% versus expectations of -0.8%.
On the surface that’s bad news. But it’s now mid-August, the economy is thought to be stabilizing, and the more inventories slashed in the past, the more room to grow in the future. So reduced inventories are bad for second-quarter GDP, but for the current quarter the report suggests GDP may grow if businesses have restock. This should indicate whether or not executives are confident the recovery is underway.
The Census Bureau report also showed that sales and manufacturers' shipments improved by 0.9% in June, an encouraging sign that the expected stabilization is taking place. And recovery will have a long way to go, as sales are still down 18% since June 2008.
“The continued decline in the inventory-sales ratio is very encouraging from the perspective of growth in the second half of the year,” said analysts from RDQ. “The economy is coming off a record pace of inventory liquidation in the second quarter and a reduction in the pace of liquidation in the third quarter is likely to push up output levels significantly.”
They concluded: “From the perspective of second quarter GDP, it appears that the accumulated revisions point to a downward revision to real GDP growth to -1.7% from -1.0%.”