Business Inventories Up For Second Straight Month

The massive inventory draw-down by U.S. businesses prompted by the recession appears to be over, as business inventories rose for the second straight month in November, rising 0.4%, the U.S. Commerce Department announced Thursday. What's more, October's inventory rise was revised upwards to a 0.4% increase, from the previously estimated 0.2% gain.

%%DynaPub-Enhancement class="enhancement contentType-HTML Content fragmentId-1 payloadId-61603 alignment-right size-small"%% The consensus of economists surveyed by Bloomberg News was that inventories had risen 0.2% in November. Prior to October, U.S. business inventories had fallen for 13 straight months. Despite the recent rises, inventories have fallen 11.1% in the past year.

Separately on Thursday, the U.S. Labor Department announced that the Import Price Index was unchanged in December, with a 1.4% dip in fuel prices offsetting rising prices for other goods. Import prices rose a revised 1.8% in November, and 0.8% in October. Meanwhile, December export prices rose 0.6%, following a 0.9% jump in November, and an 0.2% rise in October. The results of a Bloomberg News survey had predicted December's import and export prices would increase by 1.7% and 0.8%, respectively.

Sales Surge in November

Returning to the inventory report, sales surged 2.0% in November -- the largest one-month gain in two years -- after rising 1.1% in October. Further, although the impact of the recession can still be seen in the year-over-year sales figures -- sales have declined 11.1% since November 2008 -- that's nevertheless a smaller decline than October's 12.6% year-over-year decline, another indication that sales momentum is headed in the correct direction.

With sales rising faster than inventories, the inventory-to-sales ratio fell again, to 1.28 in November, from 1.30 in October and 1.32 in September. The ratio, an indicator of demand, was at 1.43 in April, and at 1.43 a year ago, in November 2008.

In November, a decline in retail inventories was offset by an increase in merchant wholesale and manufacturing inventories.

Economic Analysis

As noted, the second straight inventory rise suggests that the long draw-down in inventories is coming to an end. Economists generally like to see three months of data before declaring a trend, but the November data, when combined with other manufacturing and services sector activity statistics, suggests that the long period of inventory paring is over.

During the recent recession, businesses overreacted due to worries about having product they couldn't sell, and cut inventories too much: They're now replenishing them, and that will boost manufacturing and wholesale commercial activity. What's more, it undoubtedly will result in an increase in jobs at the manufacturing level and add to U.S. GDP for at least the next two or three quarters.
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