Good News on Inventories

02/09/2010 2:35 pm EST

Focus: MARKETS

Jim Jubak

Founder and Editor, JubakPicks.com

And now for a break from the euro and today’s Greece bailout rumor fest. (For more on today’s euro bounce, see this earlier post.)

Real news on the US economy; and it’s very good news indeed.

Inventories at US wholesalers dropped in December, according to data released this morning by the Commerce Department. (Guess somebody made it in through the snow down there.)

That was an unexpected fall. Economists were expecting that inventories would climb in December.

And a big fall. A 0.8% decrease in inventories after inventories unexpectedly climbed in November by 1.6%. That November increase was the largest since July 2004 and raised doubts about the sustainability and strength of the US economic recovery.

So why are these inventory numbers so important and such positive news?

In the early stages of a strong economic recovery, companies should be having trouble keeping inventory on shelves and in warehouses. Demand should be picking up so fast that it surprises companies that have hunkered down for the recession. With recession-thinned staffs and reduced hours at many plants, suppliers should be having difficulty at this stage of a recovery in filling orders.

The decline in inventories in December looks like exactly the kind of drawdown in inventories that the economy should be seeing right now.

The November increase in inventories, on the other hand, raised the question of whether companies that had sold down their initial stock of goods on hand and then reordered weren’t seeing demand pick up as much as they had projected. That increased the odds that sales might not be accelerating very quickly and that in December, the inventory numbers would start to show a pileup of unsold goods.

That’s precisely the fear that the consensus among economists reflected, as the median forecast among 31 economist surveyed by Bloomberg called for a 0.5% increase in inventories in December.

Inventory levels are now just 1.12 months of sales. That’s the lowest level since a record low of 1.11 in June 2008.

The US economy grew at a 5.7% annual rate in the fourth quarter of 2009. The inventory numbers from wholesalers increase the chances that US economic growth for 2010 will come in ahead of the 2.7% that’s the consensus forecast right now.

Of course, since there’s no silver lining without a cloud, stronger-than-expected economic growth will set the financial markets fretting again about when the Federal Reserve will start to raise interest rates.

Full disclosure: I don’t own shares of any company mentioned in this post.

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