Manufacturing inventories were slashed once again in July, but in the process one significant item was constructed: a stage for future growth.
Inventories were cut by 1.0% in July, the 11th straight decline, pushing the annual decrease to 11.8%. That cutback is slightly more than economists were forecasting, but it’s a slower contraction than the revised 1.4% reduction in June.
Cutbacks to inventories indicate executives are clearing overhang in anticipation of soft orders, which doesn’t bode well for overall growth. However, this data is from July, while this morning’s 2.7% surge in retail sales ― the fastest pace in three years ― was for August.
If businesses are optimistic about consumer spending, then July’s reduction in inventories could mark the bottom, which in dollar terms was the lowest since March 2006. And if growth resumes at a rate consistent with the retail sales report (between +3% and 5% in Q3), then businesses could begin restocking inventories more quickly than usual.
In other words, the 1% cutback is bad news for second-quarter GDP, but it is probably good news for the third quarter.
“It looks like the ramping up of production is going to continue after industries see that the consumer is back in the game,'' said Christopher Rupkey, chief economist at the Bank of Mitsubishi-Tokyo, before the report.
Inventories of motor vehicles & parts fell 2.1% in July, subtracting from the 3.1% drop in June. For August, that number should rebound as light vehicle sales have been sharply up for the past two months, moving from an annual pace of 9.7 million units in June to 14.1 million in August.
Also in the report: business sales edged up 0.1% in July. The increase is welcome but it’s not even close to matching the 1.1% gain in June. Since July 2008, sales have fallen 17.8%.
Lastly, the inventory-to-sales ratio edged down to 1.36 months, meaning it would take 1.36 months at the current sales pace to work off current overhang.