Inventories Rise as Businesses Gain Confidence

Business inventories continue to rise
Business inventories continue to rise

U.S. business inventories rose for the fourth time in five months, climbing 0.5% in February, the U.S. Commerce Department announced Wednesday, in a reversal of the drawdown prompted by the severe recession.

The results were in line with expectations, according to economists surveyed by Bloomberg News. Inventories rose a revised 0.2% in January, up from the previously released unchanged statistic, and declined 0.2% in December.

February inventories increased in the manufacturing sector, but fell slightly in the retail and merchant wholesale sectors.

Also in February, sales rose 0.3%, with all three sectors (manufacturing, retail, merchant wholesale) registering gains. Sales are now up 6.8% in the past 12 months, as of February 2009, and although investors should keep in mind that current sales increases stem from a low base as a result of the recession, the year-over-year increase is still a substantial improvement from the double-digit, year-over-year declines recorded during the depths of the recession.

The inventory-to-sales ratio rose as well, inching up to 1.27 in February from 1.25 in January and 1.26 in December. The ratio, an indicator of demand, was at 1.46 in January 2009.

Additional Boost For U.S. Economy?

There's now talk that the unusually deep drawdown in inventories will lead to a protracted period of inventory rebuilding, which would add to U.S. gross domestic product in the quarters ahead.

However, longer term, organic demand will have to take over to maintain adequate GDP growth. In other words, it's going to take more than replenishing shelves to maintain the economic recovery. It will require a sustained increase in sales -- and that points to the importance of job growth.

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