Businesses trimmed inventories at the wholesale level again in January even though sales rose for a 10th consecutive month. The dip in inventories underscored that businesses remain cautious about restocking their depleted shelves.
The Commerce Department said Wednesday that inventories at the wholesale level were reduced 0.2 percent in January following a 1 percent drop in December. Sales were up a solid 1.3 percent, the best showing since a 3.6 percent rise in November.
Economists are hoping that the steady gains in sales will soon prompt a sustained rebound in inventory restocking. That would trigger increased factory production and provide support for the fledgling recovery.
Analysts believe the stage has been set for such a rebound given how lean inventories are at present following a massive inventory liquidation that occurred during the recession. Inventories at the wholesale level for 13 straight months and have been down 15 of the past 17 months. The only gains in wholesale inventories occurred in October and November.
With the January drop in inventories, the ratio of inventories to sales dipped to a record low of 1.10, meaning it would take 1.10 months to deplete inventories at the wholesale level given the January sales pace. That was the lowest point since the data series began in 1992.
The January drop in inventories was a disappointment. Economists had expected inventories would post a small increase of 0.2 percent. The government also revised the December report to show a bigger inventory drop of 1 percent rather than the 0.8 percent fall that was originally reported.
Economists believe that the current recovery can't be sustained until businesses begin consistently restocking their depleted shelves. That restocking would mean higher orders to factories and growing demand for manufacturing workers.
Wholesalers hold 25 percent of all inventories with factories holding about one-third and retailers holdings the rest.
Businesses slashed inventories by massive amounts during the recession as they struggled to control costs in the face of a deep recession and falling demand for their products.
But the economy got a boost in the final three months of last year from a slowdown in the inventory liquidation process.
The swing from massive inventory reductions contributed two-thirds of the economy's overall growth of 5.9 percent in the October-December period. Economists are now hoping to see the beginning of sustained inventory rebuilding.
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