Business inventories fall in July, but sales rise

WASHINGTON — Businesses slashed their inventories for the 12th straight month in July, but sales posted a second consecutive gain, providing hope that companies soon will switch from trimming stockpiles to increasing their orders.

The Commerce Department said Tuesday that inventories dipped 1 percent in July, slightly more than the 0.9 percent cut that economists expected.

Sales rose 0.1 percent in July after a 1.1 percent increase in June, the first back-to-back gains in a year. The rebound reflected a 0.5 percent increase in sales at the wholesale level, which offset a flat reading on sales by manufacturers and a 0.2 percent decline at the retail level.

In a separate report, the government said August retail sales jumped 2.7 percent, reflecting a surge in auto sales fueled by the government's popular Cash for Clunkers program and strong demand in other areas.

The big August gain in retail sales boosted expectations that consumer spending will help lift the country out of a recession in the current July-September quarter.

Economists are hoping that a rebound in sales will convince businesses to ease their inventory reductions further and instead restock shelves. An increase in orders would boost production and lift the fortunes of the nation's beleaguered manufacturing sector.

The July reduction in inventories marked the 12th consecutive monthly decline, the longest stretch since inventories had been cut for 15 straight months in a period from 2001 to 2002 that covered the country's last recession.

The reduction in inventories has dragged down overall economic growth. Falling inventories reduced the gross domestic product by 1.39 percentage points in the April-June period. The overall GDP fell 1 percent at an annual rate in the second quarter, so there would have been growth in the spring if not for the big inventory cuts.

A 1.4 percent decline in inventories held by wholesalers led the overall drop, along with cutbacks of 1 percent at the retail level and 0.7 percent at the manufacturing level.

Wholesale inventories are goods held by distributors who generally buy from manufacturers and sell to retailers. They make up about 25 percent of all business stockpiles. Factories hold another third of inventories and retailers hold the rest.

The drop in July left the inventory to sales ratio at 1.36 in July meaning it would take 1.36 months to exhaust stockpiles at the July sales pace. The ratio had been 1.38 in June, and 1.27 in July 2008.