I would think this news would be a good thing for the markets...
Top Financial News
Mon, 09 Aug 1999, 4:53pm EDT
Surge in U.S. Wholesalers' Sales in June Outpaces
Growth in Inventories
By Noam Neusner and Vince Golle
U.S. Economy: Wholesale Sales Outpace Inventories (Update2)
(Updates with closing market activity.)
Washington, Aug. 9 (Bloomberg) -- Sales at U.S. wholesalers
rose in June at their fastest rate in more than two years, while
inventories grew at such a slow pace that companies may need to
boost production to meet consumer demand.
Sales grew 1.9 percent to $228.1 billion in June -- the
fifth increase in a row and the biggest gain since January 1997,
Commerce Department figures showed. Inventories rose 0.3 percent
to $291 billion after a 0.2 percent increase in May.
Warehouses had enough goods to last 1.28 months, the
smallest inventory-sales ratio since July 1997. That probably
means companies will have to order more goods, which will add to
economic growth in the third quarter, analysts said. Faster
growth could be the incentive for Federal Reserve policy-makers
to raise interest rates to ward off higher inflation.
``It still looks like inventories are too low,' said Diane
Swonk, chief economist at BankOne Corp. in Chicago. She raised
her expectation for third-quarter gross domestic product to 4.1
percent from 3.2 percent, largely because she sees inventories
rising.
Nor are wholesalers' inventories the only ones shrinking. In
the last eight months, U.S. factory inventories have fallen seven
times, including a 0.1 percent decline in June. ``This sets us up
for a very strong second half,' Swonk said.
Wholesale inventories account for less than a third of all
U.S. stocks of merchandise, with factory and retail inventories
rounding out the rest. The Commerce Department will include
retail stockpiles in its business inventory and sales report
Friday.
Today's report showed increased sales in most categories of
goods. The biggest gains were in petroleum and farm products.
General Motors
Some companies have said they will increase production.
North American automakers say they will produce 4.1 million
vehicles in the third quarter, exceeding the record 3.6 million
vehicles in July-September 1997, Ward's Automotive Reports said.
General Motors Corp., the world's largest automaker, said it
will build 13,000 more cars and trucks than planned in the third
quarter, a 1 percent increase in production to meet rising U.S.
demand.
Businesses also are expected to build their stocks before
the end of the year to avoid disruptions that may be caused by
year 2000 computer glitches. Moreover, businesses may order more
supplies to avoid further price increases for intermediate goods
such as milled steel used by appliance makers. Intermediate good
prices, excluding food and energy, rose 0.5 percent in June.
``For so long, a business could say `I don't need to buy
this today, prices may be lower tomorrow',' said economist Paul
Kasriel at Northern Trust Securities in Chicago. ``They can't say
that now.'
Markets
Higher interest rates may add to the cost of restocking.
Federal Reserve policy-makers concerned with runaway growth may
try to cool off the economy by raising interest rates later this
month. Bond investors shared this concern, and the benchmark 30-
year U.S. Treasury bond fell 11/16 point, pushing up its yield 6
basis points to 6.23 percent.
Stocks were mixed. The Dow Jones Industrial Average rose 6
points, or 0.1 percent, to 10,707.70. The Nasdaq Composite Index
fell 29 points, or 1.1 percent, to 2518.80.
Even if companies rebuild stockpiles in the second half,
slow inventory growth or even declines may become more usual.
Streamlined management means companies can keep fewer goods in
their warehouses. Networked computers and other methods enable
companies to bypass wholesalers and ship directly to retailers.
Total business inventories once swung between increases and
decreases in the double-digit percentages. Since 1996, changes
have been more moderate, with growth between 2 percent and 5
percent.
Pentacon
``It isn't any secret that technology and outsourcing have
helped to take a bite out of what companies have to keep in
inventories,' said Brian Fontana, chief financial officer of
Pentacon Inc., a Houston-based distributor of fasteners to Boeing
Co., General Electric Co. and Harley-Davidson Inc.
Pentacon plans to cut its five distribution centers for
aerospace parts down to two. That, along with a common system to
track parts, would help reduce inventories by at least 10
percent.
The ongoing reduction in inventories is increasingly cited
by economists when explaining how the U.S. economy, now in its
second-longest expansion ever, can avoid inflation, which
normally accompanies growth.
``Intermediate production and distribution processes, so
essential when information and quality control were poor, are
being bypassed and eventually eliminated,' said Fed Chairman
Alan Greenspan in a May speech.
The continued decline in the wholesale inventory-to-sales
ratio may indicate yet another trend: Companies misread last
year's crisis in world financial markets. Those declines, while
hurting demand overseas and U.S. exporters, made U.S. capital
markets more attractive to lenders and therefore cheaper for
borrowers.
Cheaper capital spurred consumers to spend and businesses to
borrow, surprising U.S. producers, who set their factory
schedules three to six months ago, economists said.
``Businesses unintentionally drew down their inventories,'
Swonk said. |
