Businesses whittle down inventories

WASHINGTON -- Businesses pared excess inventories in July for the sixth straight month, helped out by a solid gain in sales. But some economists worried that stocks could pile up again if consumers, shaken by last week's attacks, close their pocketbooks.

Unsold goods on shelves and back lots fell by a seasonally adjusted 0.4 percent in July, following an even bigger 0.6 percent reduction the month before, the Commerce Department reported Monday.

At the same time, businesses' sales rose 0.4 percent, after having plunged by 1.5 percent in June.

Economists say companies must whittle excess stocks in order to set the stage for increased production in the future, something that could help economic growth down the road. But last week's terror attacks add new uncertainties to companies' business plans, economists said.

May build back up

"Just when businesses thought they finally cleared most of their unwanted inventories from stores and warehouses, inventories may quickly build again," said Mark Zandi, chief economist at Economy.com. "If consumers pull back spending, businesses may have to cut production even more to get output back in line with sales."

Consumers, whose spending accounts for two-thirds of all economic activity, have been the main force keeping the United States out of recession. If consumers collapse, they might throw the economy over the edge, analysts said.

Even before last week's attack's, the economy was ailing.

Federal Reserve Chairman Alan Greenspan had attributed much of the economy's weakness to an effort by businesses to cut back quickly on production to bring inventories back in line with sales.

Double-edged sword

The economic slowdown, which started in the second half of last year, has curbed Americans' appetite for goods, causing an inventory pileup. To reduce inventories, companies have laid off workers, reduced shifts and deeply discounted merchandise.

While economists view inventory reduction as a good thing, it does subtract from economic growth as measured by the gross domestic product. Taking into account lost business from the attacks and the inventory liquidations in July, third quarter GDP could come in negative, meaning the economy slipped into reverse. Zandi lowered his third quarter GDP estimate from positive 0.8 percent to negative 0.2 percent.

Asked whether he thought the economy might tip into recession, Treasury Secretary Paul O'Neill told CNN Monday: "I don't think so."

O'Neill made numerous TV appearances Monday aimed at bolstering confidence. "We have a wonderfully resilient economy," O'Neill said on Fox. "We're going to see a revival of our economy." He predicted the economy would return to a "good growth rate" next year.