Inventory Restocking to Propel U.S. Manufacturing: Economy

The need to rebuild depleted inventories may supersede spending on business equipment as the catalyst propelling gains in U.S. manufacturing in early 2012.

Orders (CGNOXAI%) for non-defense capital goods excluding aircraft, a measure of future corporate investment, dropped 1.2 percent in November, the biggest decline in 10 months, according to Commerce Department data today. A report yesterday showed a gauge of stockpiles at factories’ customers slumped in December to a seven-month low.

Bookings by retailers like Macy’s Inc. (M) and Target Corp. may increase after holiday sales climbed more than forecast, putting to rest concern that the world’s largest economy was tipping back into a recession. At the same time, the expiration of a 100 percent depreciation allowance for equipment purchased in 2011 probably pulled some sales into last year.

“The big story is the inventory one,” said Stephen Stanley, chief economist at Pierpont Securities LLC in Stamford, Connecticut. “Retailers were apparently extremely conservative in ordering goods for the holiday season and are now looking at depleted shelves. You did see a bit of a bulge at the middle of last year in investment on equipment and software that had to do with tax policy. We are now seeing a little bit of a hangover from that.”

Stocks fell as concern grew that European banks may need to raise more capital amid the region’s sovereign debt crisis. The Standard and Poor’s 500 Index dropped 0.2 percent to 1,274.04 at 11:55 a.m. in New York.

Less Inflation

In the euro region, inflation (ECCPEMUY) slowed in December for the first time in five months, giving the European Central Bank room to lower borrowing costs further as the economy edges toward a recession.

Signs of a strengthening U.S. economy contrast with indications of a global slowdown. China’s home prices fell for a fourth month in December, SouFun Holdings Ltd., the nation’s largest real-estate website owner, said today.

Retail sales at U.S. stores open more than a year may have gained as much as 4.5 percent in December, more than previously estimated, as holiday discounts attracted shoppers, a trade group said today. Purchases in December were earlier projected to have advanced as much as 4 percent, the International Council of Shopping Centers said in a statement today.

Demand at Ford Motor Co. (F), General Motors Co. (GM) and Chrysler Group LLC exceeded analysts’ forecasts in December, other data also showed today. Ford’s U.S. sales climbed 10 percent from a year earlier, while purchases of Chrysler vehicles were up 37 percent. At GM, they increased 4.5 percent.

‘Feeling Pretty Good’

“Given recent sales trends and consumer confidence numbers, we’re feeling pretty good about where the industry is going,” Don Johnson, vice president at GM for U.S. sales, said on a conference call last month.

Stockpiles will climb at a $55 billion annual rate in the first six months of 2012 on average, up from a projected $31 billion gain in the past three months, according to a forecast by economists at JPMorgan Chase & Co. in New York. In contrast, spending on equipment and software will rise at an average 7.5 percent rate, down from an estimated 11 percent advance in 2011.

An Obama administration tax credit may have contributed to an increase in business equipment demand in the months before the end-of-the-year deadline. A provision allowed companies to depreciate 100 percent of capital outlays in 2011 and 50 percent in 2012. Today’s factory order report showed that effect may be waning.

Capital Goods

The drop in orders for capital goods excluding aircraft and military equipment was the biggest since January 2011 and followed a 0.9 percent decrease in October.

Shipments of such equipment, which are used in calculating gross domestic product, dropped 0.8 percent, marking the third consecutive decrease.

The report also showed inventories climbed 0.5 percent in November, indicating factories were already ramping up production to restock warehouses. Manufacturers had enough goods on hand to last 1.34 months at the current sales pace, up from 1.33 in October.

Manufacturing grew in December at the fastest pace in six months, bolstered by gains in production and orders, a report from the Tempe, Arizona-based Institute for Supply Management showed yesterday.

The group’s inventory gauge, which measures stockpiles of raw materials and inputs for manufacturing, showed stockpiles contracted for a third consecutive month. The gauge of customer inventories (NAPMCINV) dropped 15 points to the lowest level since May. It was the second-biggest decrease for the measure in records dating back to 1997.

More Orders

“Low customer inventories provide pull and the promise of new orders for manufacturing,” Bradley Holcomb, chairman of the ISM factory survey, said in a telephone interview yesterday from Dallas.

One caveat is that consumer spending will need to keep growing this year to ensure that manufacturers will continue to boost production, said Pierpont’s Stanley. That could be an issue as incomes haven’t grown fast enough, forcing households to save less in order to increase spending, he said.

“I look for an improving labor market to generate sufficient income gains to allow households to spend decently and save more as well,” Stanley said. “The expansion is more likely to plod than gallop.”

To contact the reporter on this story: Bob Willis in Washington at bwillis@bloomberg.net

To contact the editor responsible for this story: Christopher Wellisz at cwellisz@bloomberg.net

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