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2.7%  Q1 GDP    4.57%  avg. 30-year mortgage     9.5%  Unemployment

Business inventory growth hits 2-year high

Interesting piece of economic data out this morning: The rate in increase in business inventories -- what businesses keep on their shelves -- hit a two-year high, according to the Commerce Department.

Inventories rose for the second straight month, up by .5 percent in February, following a .2 percent rise in January. The February rise was more than analysts expected and the biggest jump since July 2008.

Okay, what does this mean?

Well, there are two ways to look at it, but first you should understand what inventories mean. There are few better measures of what businesses think about you, the consumer, than their inventories. Businesses try to keep inventories at just the right level -- not too much stuff to sell, not too little. If inventories are too large, that means they have over-ordered and are carrying excess stuff they aren't selling and are paying to store. It also means it's stuff they've paid for, probably with loans, and because it's not selling, it's harder for them to pay back their loans.

On the surface, you would think that businesses increasing inventories is a good sign of a recovering economy and, to a point, it is.

But know this: During recessions -- like the Great Recession we just went through -- businesses allow their inventories to drop in order to save money. Often, they sell their stuff at deeply discounted prices, which does their bottom line no good.

When the recession begins to recede, businesses carefully build back up their inventories, and that causes a boost in manufacturing, which relates directly to GDP, which we saw rise in the fourth quarter of 2009 and first quarter of this year.

So, yes, inventories increasing is a good sign. But just remember that they are being built back up from nothing-on-the-shelves levels. So today's data should be looked at not as forward progress, but as scratching to get back to where we were.

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By Frank Ahrens  |  April 14, 2010; 12:00 PM ET
 | Tags: Business, Commerce Department, Economy, Inventory, Recession, Retailing, United States Department of Commerce, Wholesale  
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Comments

Getting back is hard. Poor boys rise to fortune and old-established firms whose founders have passed away go to pieces under the management of the heirs. Everybody in business should know what it is like to be poor. Poor inventory management can cost you everything. The right information can get you everything. Information is more important. It wants to be free, but it can't, it's power and currency. A constant process of trial is going on and it keeps going on. Those with requisites for success come to the fore and those who lack it drop to the rear. That's why bailouts are certain to fail. Quality inventory maintains value. Your junk isn't worth holding. It's not worth the space it is taking up and then the space is empty. We're losing space jobs and paying for GM inventory loses. They could of lost less without us. A scarcity of high business ability explains fortunes. In the end there must be a master mind there or the business starts to run down. There's inventory and motivation for the future. It's time to kill and a lot full of inventory can kill you. The GM case puts the gun to the public head. It's like Russian roulette as opposed to market economics with supply and demand. Interesting.

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Posted by: tossnokia | April 15, 2010 8:02 AM | Report abuse

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