Wholesale inventories rise in May, sales fall

[July 10, 2010]  WASHINGTON (AP) -- Inventories held by wholesalers rose for a fifth consecutive month in May but sales fell for the first time in more than a year, sending a cautionary signal about the strength of the recovery.

Wholesale inventories increased 0.5 percent while sales dropped 0.3 percent, the Commerce Department said Friday. It was the first decline for sales since March of 2009.

The May sales decline is the latest sign that the economic recovery could be losing momentum in the second half of the year. Weakness in sales could discourage businesses from boosting their orders. That would translate into a slowdown in factory production.

Businesses helped spur the recovery by rebuilding their inventories after slashing them during the recession. The gross domestic product expanded at a 5.6 percent rate in the final three months of last year, largely because of the swing in inventories.

The trend in inventory rebuilding continued in the first quarter of this year, but at a more modest pace. That was among the reasons growth slowed to 2.7 percent.

Mike England, an economist with Action Economics, said Friday's wholesale inventories report has persuaded him to lower his growth estimate for the April-June quarter, to 2.8 percent from 3.3 percent. England noted that the report lowered April's inventory growth to a 0.2 percent increase -- half the initial estimate of 0.4 percent.

But Peter Newland, an economist at Barclays Capital, said the drop in sales wasn't a major concern because the inventory to sales ratio remained near a record low. He said that should spur businesses to "continue to rebuild stock levels in coming months."

Many economists believe overall economic growth will slow to around 2 percent in the second half of this year. That's partly because they expect less of a boost from inventory rebuilding in coming months.

That could be bad news for manufacturers, one of the strongest sectors since the recession ended.

It also would come as the recovery is starting to weaken. Both consumer spending and business hiring have slowed, and the housing market has struggled since government incentives for homebuyers ended in April. The jobless rate fell to 9.5 percent in June from 9.7 percent in May. But the change was largely the result of people giving up their work searches.

Economists worry that weaker growth won't bring down the jobless rate quickly.

"We are on a muddle-through trajectory for this recovery with GDP growth at about half the rate you would normally see coming out of such a steep downturn," England said.

Even with the May gain in wholesale inventories, they are 2.1 percent below where they were a year ago.

Inventories at the wholesale level had fallen for 13 consecutive months through September of last year. Businesses went through a massive liquidation of their stocks in a struggle to contain costs during the deepest recession in decades.

The 0.3 percent drop in sales in May followed a gain of 0.9 percent in April.

The combination of declining sales and rising inventories pushed the ratio of inventories to sales up slightly to 1.14 in May from a record low of 1.13 in April. That means it would take 1.14 months to deplete stocks at the May sales pace.

Over the past decade, a typical level for the inventory to sales ratio has been between 1.15 months to 1.2 months.

[Associated Press; By MARTIN CRUTSINGER]

Copyright 2010 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.