Better-than-expected retail sales prompted businesses to restock shelves and warehouses, as business inventories rose 1% in July -- the largest gain in two years -- the U.S. Commerce Department announced Tuesday.
A Bloomberg survey had expected business inventories to rise 0.6% in July after a 0.3% rise in June. Inventories rose 0.1% and 0.4% in May and April, respectively.
Strong Sales Prompt Restocking
As noted, stronger sales, which rose 0.7%, gave retailers and wholesalers the confidence to replenish those shelves in July. It was a broad-based sales gain, with sales rising in all three categories -- retail, manufacturing, and merchant wholesale.
Sales are now up 9.2% in the past 12 months, compared to July 2009. 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 declines recorded during the depths of the recession.
Also, the inventory-to-sales ratio remained steady at 1.26 July. The ratio, an indicator of demand, was at 1.35 a year ago, in July 2009.
Sales, Inventory Gains Ease Double-Dip Concern
July's business inventory report represents another "shot-in-the-arm" for the economic bulls. Business inventory restocking has played a major role in the economic recovery to-date, and slowing commercial activity in the second quarter has prompted some economy watchers to argue that inventory rebuilding would soon taper, due to inadequate sales, resulting in substantially lower U.S. GDP growth -- and possibly the start of a double-dip recession --- in the second half of 2010.
However, the decent sales gain in July should ease concerns that the economic recovery will slow to a crawl in the immediate quarters ahead, and businesses displayed confidence in that firmer sales trend by increasing inventories.