Business Inventories Rise 0.9%, Suggesting Stronger Growth Ahead

Business Inventories Rise 0.9%, Suggesting Stronger Growth Ahead
Business Inventories Rise 0.9%, Suggesting Stronger Growth Ahead

In a sign that holiday sales season will be better than initially expected, business inventories rose 0.9% in September as companies re-stocked their shelves for the nation's busiest shopping period. The increase matched the consensus prediction of economists surveyed by Bloomberg for the month, and followed increases of 0.9% and 1.1% in August and July, respectively. By sector, manufacturing inventories rose 0.7%, merchant wholesale increased by 1.5%, and retail increased 0.8%.

Sales rose 0.5% to a $1.1 trillion annual rate, and are now up 8.9% compared to September 2009, an improvement from the 8.2% year-over-year increase recorded in August. However, economists are careful to point out that current year-over-year sales increases stem from a low base as a result of the recession, which makes large percentage gains easier to achieve.

Meanwhile, the inventory-to-sales ratio remained the same in September at 1.27, which translates into a 1.27-month supply of goods at the current sales pace. The ratio, an indicator of demand, was at 1.30 in September 2009.

The Expansion Has Legs

September's business inventory report provides more support for the economic bulls, who argue that the economic expansion has only just begun.

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Earlier this year, economic bears argued that the completion of the inventory re-stocking phase of the expansion, combined with sub-par sales, would lead to a moderation in GDP growth. And U.S. GDP growth did slow to 1.7% in the second quarter. However, demand as measured by sales has been better than expected, and that has led some businesses that have experienced good sales, and others with lean inventories, to re-stock shelves.

All other factors being equal, September's stronger than expected inventory build-up should lead to an upward revision of the initially-estimated 2% U.S. GDP growth rate in the third quarter. The U.S. economy is not firing on all cylinders yet, but it's growing, and the "better business conditions story" continues incrementally to be written.