US for strong Q1 growth as inventories rise 0.6%

It just means the economy is running on more cylinders now Bernard Baumohl, Chief Global Economist, Economic Outlook Group

US wholesale inventories rose more than expected in February and sales at wholesalers reached their highest level since October 2008, brightening prospects for first-quarter economic growth.

Total wholesale inventories increased 0.6 per cent, the Commerce Department said on Friday. The results topped market expectations for a 0.4 per cent rise and prompted some economists to tweak their forecasts for first-quarter gross domestic product.

"The notable upturn in inventories suggests even stronger growth in the first quarter. We are now tracking just over four per cent growth in the quarter, above our baseline forecast of 3.5 per cent," said Michelle Meyer, an economist at Barclays Capital in New York.

Wholesale inventories in January rose by an upwardly revised 0.1 per cent. A sharp slowdown in the rate at which businesses depleted inventories contributed strongly to the economy's rebound from the worst downturn since the Great Depression of the 1930s.

The economy expanded at a 5.6 per cent annual rate in the fourth quarter, with the change in inventories accounting for the bulk of that rise. When businesses increase inventories or slow the rate at which they are liquidating them, manufacturers raise production and this boosts gross domestic product (GDP).

Analysts said the increase in wholesale inventories in February was good news for the manufacturing sector, which has been leading the economic recovery that started in the second half of 2009.

Wholesalers "are ordering more from manufacturers and that tells you the whole supply chain is going to help keep the economy growing," said Bernard Baumohl, Chief Global Economist at the Economic Outlook Group in Princeton, New Jersey. "It just means the economy is running on more cylinders now."

Sales at wholesalers increased 0.8 per cent, the 11th straight increase, to $338.7 billion (Dh1.24 trillion) in February, the highest level in 16 months, the Commerce Department said. Markets had expected sales to rise 0.5 per cent.

While inventories were expected to boost growth in the first half, the strength of the gains indicated that inventories' influence on the economy could wane in the last six months of the year.

"The slightly higher inventory trajectory relative to sales trims potential for positive inventory contributions to economic growth in the second half of the year," said Mike Englund, Chief Economist at Action Economics in Boulder, Colorado.

Englund said the strength in wholesale inventories and sales was also a reflection of a rebound in global trade and rising commodity prices. Crude oil prices hit an 18-month high earlier this week.

The rise in February wholesale sales left the inventory-to-sales ratio – a measure of how long it would take to sell stocks at the current sales pace – unchanged at 1.16 months.

In February, durable goods inventories increased 0.5 per cent, the largest gain since September 2008, while stocks of non-durable goods increased 0.8 per cent.


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