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Monday July 17 12:39 PM ET

Business Inventories Jumped in May

By Barbara Hagenbaugh

WASHINGTON (Reuters) - U.S. firms' inventories piled up in May at their quickest rate in six months, the government said Monday in a report suggesting the economy grew at a faster pace in the second quarter than initially thought.

But the data could portend a slowdown months from now if there is not enough consumer demand to buy up the stockpiled goods.

The Commerce Department said the value of inventories held by manufacturers, wholesalers and retailers rose 0.8 percent to a seasonally adjusted $1.181 trillion after an upwardly revised 0.5 percent gain in April.

The rise in May was the 17th straight monthly increase and the biggest gain since a 0.9 percent jump in November, the department said. Inventories were up 6.1 percent in May from the same time last year.

Analysts said the unexpected surge suggested a stronger growth rate for second-quarter gross domestic product, due to be released July 28.

Although economists expected second-quarter GDP was slower than in the first quarter, when the economy grew at an annual rate of 5.5 percent, many said the business inventory figure would raise the estimate by perhaps half a percentage point to as high as 4.5 percent -- still a solid figure.

``I think it does indicate much stronger growth in the just-ending quarter and it indicates that the economy remains strong moving into the third quarter,'' said Mark Zandi, chief economist at RFA Dismal Sciences.

INTENTIONAL OR UNINTENTIONAL PILEUP?

Although economists were in agreement about what Monday's figures would mean for GDP, there was a difference of opinion over whether the rise in inventories suggested a weakening in demand that left goods piled up on producers' shelves or the opposite -- stockpiling in anticipation of vigorous buying.

Those who believed that the pileup was intentional pointed out that the stock-to-sales ratio remained at 1.32 months' worth in May, the lowest level since November. The ratio measures how long it would take to deplete inventories at the current sales pace and some economists said that the tight ratio indicated that sales likely would remain strong.

``The accumulation has been quite solid but it seems to be keeping pace with sales,'' said chief economist Dan Laufenberg of American Express Financial Advisors. He noted that part of the buildup in the second quarter was likely a hangover from the volatility surrounding the changeover to the year 2000, or ''Y2K.''

Firms had increased inventories during the fourth quarter to prepare for computer-related glitches from Y2K. Inventories declined in the first quarter when the year 2000 arrived with few problems and firms returned inventories to normal levels in the second quarter, he said.

Sales at all levels of business rebounded in May with a 1 percent gain to $895.40 billion after a 0.6 percent drop in April. Retail sales rose 0.3 percent to $267.88 billion after a 0.5 percent drop in April.

But the rather modest gain in retail sales over the three months, coupled with a huge rise in retail inventories, suggested to some economists that firms have not yet eased output to keep up with falling consumer demand in the retail and automobile sectors.

``There's a surprise factor there and it takes people a while to catch up to it,'' said Robert Dederick, an economic consultant at Northern Trust Co.

The value of the inventory of retail goods jumped 1.4 percent in May to $382.33 billion in May after a 0.3 percent rise in April, the department said. The biggest retail stock pile-ups in May were in automobiles, which rose 2 percent, and in clothing, which rose 1.7 percent.

-- (M@rket.trends), July 18, 2000