Another Notch Down in Business Inventories

Retailers, wholesalers and manufacturers drew down inventories at a 1.1 percent pace in April, which represents one more month of progress in an extremely long process, as businesses got caught with far too much supply early in the recession. The weak sales environment has firms still searching for an elusive supply-demand equilibrium.

Inventory Cycle Dragging on

April's data show that the inventory cycle is continuing in full force—the second quarter will likely experience another substantial inventory change.

The overall inventories-to-sales ratio has likely peaked, albeit at an extremely high level, showing that stockpiles remain severely misaligned with sales. While sales are still falling, the pace slowed to -0.3 percent on the month.

Sectoral Differences

Manufacturers have made the least progress in the inventories-to-sales ratio, which remains uncomfortably elevated. Signs of life in new orders would be a welcome relief to the sector.

Retailers seem to have been granted hope in recent data as this morning's report showed sales improved in May. Improved sales will help move inventories allowing the sector much needed improvement in the inventories-to-sales ratio.

Wachovia Corporation
http://www.wachovia.com

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