Businesses, uneasy about recovery, trim inventories

Wednesday, October 16, 2002

WASHINGTON -- Uneasy about the economic recovery, businesses trimmed their stockpiles of unsold goods in August for the first time in four months.

Inventories on shelves and back lots edged down by 0.1 percent in August, a turnaround from July when businesses boosted their stockpiles by a solid 0.4 percent, the Commerce Department reported Tuesday.

The decline represented the first time since April that businesses, including retailers, pared inventories, suggesting that companies wanted to keep stocks lean given economic uncertainties, including possible war with Iraq.

"I think it is a sign that businesses feel economic weakness is going to persist for a while," said economist Clifford Waldman, president of Waldman Associates.

"Most of the inventory-building energy in the past few months has come from retailers. Today's report tells me retailers are getting as concerned about consumers as everybody else," he said.

Businesses' sales, meanwhile, grew by 0.2 percent in August, a slowdown from the brisk 1.3 percent increase posted in July.

Taking it easy

Many businesses, whose profits took a hit during the recession and haven't recovered fully, are wary of making big commitments, including capital spending and hiring, which restrains the recovery.

Still, upbeat earnings reports from Citigroup and General Motors buoyed investors on Wall Street. The Dow Jones industrial average shot up 378.28 points to close at 8,255.68.

Tuesday's report also showed that the inventory to sales ratio fell to 1.34 months, a record low. That means it would take businesses 1.34 months to exhaust inventories at the current sales pace.

"Companies have not bought into the recovery, so they want to keep inventories extremely tight so as not to get left holding the bag," said economist Ken Mayland, president of ClearView Economics.

During the recession, businesses worked hard to get rid of excess inventories, which had piled up. To reduce them, factories throttled back production and tried to lure buyers with heavily discounted merchandise and other promotions.

The long string of inventory reductions came to an end this year as businesses, betting that there would be ample demand for goods, started to add modestly to their stocks.

In August, however, businesses seemed to question consumer appetites.

Retailers reduced their inventories by 0.3 percent and sales grew by 0.6 percent. At factories, inventories were flat in August as sales slid 0.6 percent. But wholesalers increased stocks 0.2 percent as sales rose 0.9 percent.

Among challenges facing business is how to deal with an uneven economic recovery.

The economy bolted out of the starting gates at the beginning of the year, growing at a 5 percent rate. That slowed to 1.3 percent in the second quarter.

Although economists believe the economy picked up momentum in the third quarter, expanding at a rate of at least 3 percent, many predict the economy shifted into a lower gear in the current October to December quarter.

Federal Reserve policy-makers last month decided over the objections of two members to keep short-term interest rates steady at a 41-year low. The two dissenters wanted a rate cut, which would have been the first of the year.

Economists have mixed opinions about whether the Fed will cut interest rates at its next meeting on Nov. 6.

By keeping rates low or possibly nudging them down, policy-makers hope to motivate consumers and businesses to spend and invest more, which would bolster economic growth.

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