U.S. Companies Still Have Work Ahead on Trimming Inventories

(Bloomberg) -- American companies still have work to do in slimming inventories even after making some headway in the second quarter, indicating that further efforts to trim bloated stockpiles could weigh on the economy.

The value of unsold durable goods at U.S. factories increased 0.4% in July from the prior month -- the 11th straight rise -- after a 0.3% advance a month earlier, Commerce Department data showed Monday.

The report also showed shipments of non-defense capital goods excluding aircraft, a proxy for business spending on equipment used to calculate quarterly gross domestic product, slumped by the most since October 2016. Inventories of all durable goods would last 1.68 months, the longest since November 2016.

Companies facing weaker global demand and dealing with the repercussions of volatile government trade policy may grow even more focused on inventory control if domestic sales begin to falter. So far, consumer spending has remained robust even as businesses reconsider capital-spending plans.

Total stockpiles grew an annualized $75.9 billion in the second quarter after rising in the first three months by a whopping $113.3 billion, the most since 2015, the Commerce Department’s latest GDP estimate showed. It was the first time in a year that businesses slowed the pace of accumulation, and it subtracted 0.86 percentage point from the annualized rate of GDP growth.

It’s not just factories that are finding themselves with still-elevated stockpiles of unsold durable goods. In June, the inventory-to-sales ratio at the nation’s wholesalers stood at 1.76 months, the most in a decade.

The levels of inventories of big-ticket items at factories and wholesalers relative to sales hint of lingering softness in factory output in coming months. That’s concerning for factory managers hoping for a quick emergence from the current manufacturing recession.

The latest Federal Reserve industrial production data showed an index of durable-goods output fell 0.5% in the six months through July. The gauge has been easing from a record in December 2018. As the above chart shows, it took more than three years before the index was able to surpass the previous high.

To contact the reporter on this story: Vince Golle in Washington at vgolle@bloomberg.net

To contact the editors responsible for this story: Scott Lanman at slanman@bloomberg.net, Jeff Kearns

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