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Economy in Brief

U.S. Business Inventory Cutbacks Gained Steam
by Tom Moeller February 12, 2009

Total business inventories fell 1.3% during December after a downwardly revised November decline.  The latest drop was the fourth in as many months and the rise of 0.9% year-to-year was the weakest since early-2004. The recent cutback in inventory accumulation reflects the 11.8% y/y drop in business sales. During the last three months inventories have been cut at an 11.4% rate as sales have fallen at a 40.9% annual rate.  The mismatch between inventory and sales growth caused the December inventory/sales ratio to surge further to 1.44, its highest level since the recession of 2001.  What's more is that the increase in the ratio during the last year is the swiftest since 1982. The rise ended a twenty-eight year downtrend.

Retailers cut inventories 1.0% in December and at an 11.7% rate during the last three months, the swiftest since 2001. Motor vehicle inventories continued to lead the decumulation and fell at a 15.8% rate during the last three months. Nevertheless, the inventory-to-sales ratio for automobiles remained near its historic high at 2.59. So unless sales recover soon, expect further production cuts to reduce the ratio.

Outside of autos, retailers continued with their reduction of unsold goods. Furniture, home furnishings & electronics inventories fell 1.2% in December and they are off 5.5% during the past year.  Apparel retailers cut aggressively as well. The 0.6% December decline matched the November inventory cutback and they're off 2.5% year-to-year. General merchandise inventories fell 1.1% (-2.7% y/y) during December. Overall, the inventory-to-sales ratio in the nonauto retail sector rose during December to its highest level since 2003. 

Business Inventories (%) December November October Y/Y 2008 2007 2006
Total -1.3 -1.1 -0.6 0.9 0.9 4.1 6.5
  Retail -1.0 -1.8 -0.2 -2.8 -2.8 2.9 3.5
    Retail excl. Auto -1.0 -1.5 -0.1 -1.5 -1.5 2.9 4.9
  Wholesale -1.4 -0.9 -1.2 3.4 3.4 5.9 8.3
  Manufacturing -1.4 -0.5 -0.6 2.6 2.6 3.7 8.2
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