Wholesale Inventory Rise Reflects Increasing Business Confidence


The U.S. economy received a double-dose of good news in the latest wholesale inventories report: Inventories unexpectedly rose 1.9% in October to $427.1 billion -- a gain that provides more evidence that suppliers and businesses expect a decent holiday sales season. And, September's inventory gain was revised higher, to a 2.1% rise from the initially estimated 1.5% increase.

A Bloomberg survey had expected October wholesale inventories to rise 0.9%. Inventories rose 1.2% in August.

Inventories are now up 9.9% compared to a year ago in October 2009, and higher than the 8.5% year-over-year increase recorded in September.

Wholesale sales in October rose 2.2% to $362.1 billion and are now up 13.4% compared to a year ago in October 2009, and higher than the 12% year-over-year rise recorded in September. However, economists are careful to point out that current year-over-year increases stem from a low base as a result of the recession, hence large gains are easier to achieve.

Meanwhile, the inventory-to-sales ratio was flat at 1.18 in October, which means companies had a 1.18-month supply of goods in stock at the October sales pace. The ratio, an indicator of demand, was at 1.22 a year ago in October 2009. It hit a record low of 1.13 months in April.

Broad-Based Durable Goods Inventory Gain

Wholesale inventories of durable goods -- products whose service life is several years -- increased 0.9%, and non-durable goods inventories rose 2.2%

Among durable goods inventories, metals rose 2.2%, computer equipment increased 1.9%, electrical equipment rose 1.5%, miscellaneous durable goods rose 1.5%, furniture increased 1.0%, machinery increased 0.9%, professional equipment climbed 0.8%, and hardware rose 0.6%. Meanwhile, lumber inventories fell 0.6% and auto inventories dipped 0.1%.

In the non-durable goods, inventories for farm products surged 20.5%, petroleum products rose 3.5%, paper products increased 2.7%, and apparel rose 0.6%. Meanwhile, drug inventories declined 1.0% and chemical inventories fell 2.3%.

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Wholesale inventories comprise about 40% of the U.S. business stockpiles, factory inventories about 38%, and retail inventories about 22%.

In general, economists prefer to see wholesale inventories rise during an expansion, as it has historically indicated that suppliers and businesses are confident increased demand will take the products off their shelves. Moreover, inventory building and replenishing also leads to job creation, as suppliers increase production.

October's wholesale inventory report was certainly good news. With sales rising at an adequate pace and at a seven-month high, more suppliers and businesses were confident about taking possession of inventory this autumn. The report suggests a stronger retail sales season than last year, improved U.S. GDP growth in the fourth quarter of 2010 and the first quarter of 2011, and increased hiring on production increases to meet that inventory replenishment .

Obama-Republican Accord Seen Boosting U.S. GDP

Separately, the agreement between President Obama and congressional Republicans to extend the Bush-era income tax cuts will likely boost U.S. GDP growth, so say a pair of experienced professionals who follow the economy, Bloomberg News reported Tuesday.

Michael Feroli, chief U.S. economist at JPMorgan Chase & Co. (JPM) in New York, said he now expects U.S. GDP to increase 3.1% in 2011, up from his earlier 2.6% estimate. Allen Sinai, chief global economist at Decision Economics in New York, also raised his 2011 U.S. GDP growth forecast one-half point, to a range of 2.75% to 3%.