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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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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