Encouraged by Sales, Businesses Restock Shelves

The current pace of U.S. retail sales has given retailers and wholesalers the confidence to replenish shelves and warehouses, pushing inventories up a more-than-expected 0.6% in August, the U.S. Commerce Department announced Friday.

A Bloomberg survey had expected inventories to rise 0.4% in August after a 1.0% rise in July and an 0.3% rise in June.

Retail sales were up 0.1% in August, after an 0.8% gain in July. Sales rose in the retail and merchant wholesale categories, but fell in the manufacturing category.

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Sales are now up 8.2% in the past 12 months, and although investors should keep in mind that current sales increases stem from a low base as a result of the recent 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 contraction.

However, with inventories climbing faster than sales, the inventory-to-sales ratio rose slightly to 1.27 in August from 1.26 in July, which translates into a 1.27-month supply of items at the current sales pace. The ratio, an indicator of demand, was at 1.31 a year ago, in August 2009.

Two Views of an Inventory Buildup

Economic bulls will see August's inventory buildup as a further sign of a strengthening econmy, given rising export demand and decent retail sales. They would argue that if businesses were truly convinced that the expansion was stalling, they would be slashing inventories -- not letting them grow. The bears, however, will contend that the buildup in inventories is a red flag, reflecting a dip in demand.

That said, the economic expansion has advanced to a point that inventory rebuilding will not add much more to U.S. GDP growth, economists generally agree. The primary driver of U.S. GDP growth in the quarters ahead will be increases in demand -- increases in household formation which leads to home, furniture, auto, and retail sales increases -- which underscores the importance of job growth to the U.S. economy.

N.Y. Factory Index Jumps

Separately, business activity in the New York region rose more than expected in October, as the Empire State Manufacturing Index unexpectedly jumped about 12 points to 15.73 from 4.14 in September, the New York Federal Reserve announced Friday. The 15.7 reading indicates that business activity appears to be picking up after a summer slowdown. Readings above zero indicate an expansion, below zero -- a contraction. A Bloomberg survey expected the index to rise to 8.0 in October.