Bulky US inventories cast cloud on second half GDP growth
An effort by US businesses to whittle down a huge inventory stockpile could weigh on production over the second half of the year and undercut economic growth.
Business inventories have increased by more than $100 billion in each of the last two quarters, a record back-to-back increase.
The robust restocking has not been matched by strong sales growth, leaving the inventory-to-sales ratio at a near six-year high of 1.37. The ratio is viewed as a good way to measure whether an inventory build-up is unintended.
"Either we are ramping up in expectation of much stronger demand and faster sales growth than people presently expect, or we are going to have a right-sizing of this inventory," said Tim Quinlan, an economist at Wells Fargo Securities in Charlotte, North Carolina.
"If it is the latter, we will end up with inventories being a drag on growth in the second half," he said.
The government reported last month that businesses accumulated US$110 billion worth of inventory last quarter, on top of the $112.8 billion in goods stockpiled in the first three months of the year.
While the slower pace of accumulation in the second quarter meant inventories did not contribute to growth, data last week showed a bigger increase than the government had assumed.
As a result, economists anticipate inventories will be revised up later this month to show them increasing by about $130 billion during the quarter and adding at least half a percentage point to GDP growth.
"This would be a record increase. It is unlikely that inventories will continue to grow at the rapid pace evident in both the first and second quarters of this year, and slowing inventory accumulation should drag on growth in the third-quarter," said Daniel Silver, an economist at JPMorgan in New York.
The previous record increase was $116.2 billion in the third quarter of 2010, when businesses were replenishing stocks that had been drawn down for two years during the recession.
If the second quarter’s inventory gain were raised to $130 billion, JPMorgan estimates it could slice off 1.4 percentage points from third-quarter GDP growth.
A lot, however, will depend on how much of the so-called inventory correction happens in the third quarter. Most economists believe it will be spread over the second half of the year.
From manufacturing to wholesale and retail, inventories have increased strongly. In the retail sector, the inventory-to-sales ratio is a lofty 1.46, with the ratios for automobiles and clothing at 2.09 and 2.49, respectively.
"Inventories are stocking up faster than sales are moving product out the door," said Quinlan. "Anywhere between 1.25 and 1.30, I would associate that with healthy inventory levels."
Economists say near-term swings in the inventory cycle are likely to have little impact on monetary policy, given signs of a strengthening labour market. The Federal Reserve is expected to raise interest rates later this year for the first time in nearly a decade.
"The Fed is far more interested in broader underlying trends in the economy that would provide a reasonable reassurance that growth is on a sustainable track. That standard is increasingly being met," said Anthony Karydakis, chief economic strategist at Miller Tabak in New York.