Macroscope | 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.