US Business Inventories Grow by 0.2%

The US business inventories recorded a 0.2% rise in August after being unchanged in its previous month’s reading with a 0.7% annual increase. The rise was slightly higher than the forecasted 0.1% increase, but in the meanwhile the data will have no major effect on the short-term policy. Manufacturing stockpiles also recorded a 0.2% increase on the month with a 2.2% annual decrease, while inventories in the retail sector grew by 0.6% to result in a 4.8% annual increase. Business sales also grew by 0.2% in the month and was unchanged on the year with a monthly 0.3% slump in retail sales which offset a rise in wholesale sales. The inventory to sales ratio was however the same at 1.39 for the month with a major increase from 1.38 in August 2015.

Motor vehicles and parts inventories enjoyed a further growth of 1.2% in the month with a 10.2% annual increase, this rise will sustain the worries over the risk of excess inventories in the sector if sales start to slip. The inventory/sales ratio in the auto sector increased to 2.27 from 2.23 the previous month and 2.11 last year. In contrast, there was a monthly downturn in inventories at retail stores.

An outright drop in inventory investment subtracted almost 1.2 percentage points from GDP growth in the second quarter, the largest drag in more than two years, restricting the rise in output to a sluggish 1.4% pace. Economists expect inventory accumulation will rebound in the third quarter and account for much of the anticipated acceleration in GDP growth. The Atlanta Federal Reserve is currently forecasting the economy growing at a 2.1% rate in the third quarter.

Apart from concerns surrounding the auto sector, overall inventories are under reasonable control with the inventory/sales ratio below levels above 1.40 seen early in 2016. There are no significant policy implications from the data and market reaction was limited with the weaker than expected University of Michigan consumer confidence release having a greater impact.

Inventories have weighed on GDP growth since the second quarter of 2015 as businesses sold stockpiles of unwanted goods, helping to undercut manufacturing activity. Business sales rose 0.2% in August after dropping 0.3 percent in July. At August's sales pace, it would take 1.39 months for businesses to clear shelves, unchanged from July.