Businesses keep reducing inventories

One popular characterization of the current economy is a commercial climate with "green shoots" -- small, initial signs of a recovery. Business inventories may be one such sign.

Business inventories fell 1.3 percent in February, the U.S. Commerce Department announced Tuesday, as businesses continued to pare back holdings amid slack demand. Economist surveyed by Bloomberg News had expected inventories to decline 1.0 percent in February. Inventories fell 1.1 percent in January and 1.3 percent in December, and they have fallen 3.5 percent since February 2008.

Sales rise, but only a little

Meanwhile, sales increased 0.2 percent in February. Sales dropped 1.0 percent in January and 3.4 percent in December 2008, and they have declined a gargantuan 13.0 percent in the past year.

However, February's data failed to move the inventory-to-sales ratio, which remained at 1.43 -- its highest level since September 2001. In other words, at the current sales pace, it would take 1.43 months for manufacturers to deplete their inventories. In February 2008, the ratio was 1.29.

"This throws some cold water on the idea that we're carving out a [recession] bottom. As long as you have initial jobless claims running around 650,000 and getting revised higher week after week, I don't see a recovery," Jacob Oubina, a currency strategist at of New Jersey, told Reuters Tuesday.

In general, economists prefer to see business inventories decline during a recession, as it has historically indicated that businesses are bringing inventories back in-line with reduced demand, taking excess supply out of the system. That drawdown has historically set the stage for both production increases and job additions, once the economic recovery starts.

Economic Analysis: A modest uptick in sales, but it's nothing to write (or e-mail) home about. We need to see several months of rising sales before one can say the "inventories decline, but sales plunge" trend is over. Over the past year, companies did their best to reduce inventories, but they received no help from sales, which fell faster. Further, given the probable decline in consumption as a percent of U.S. GDP, the nation is not likely to experience the robust sales period that typically accompanies an economic expansion. That suggests an economy where businesses only incrementally and reluctantly increase consumer-oriented production -- something that's likely to weigh on job creation in the quarters ahead.

Read Full Story

From Our Partners