Those Fat Inventories May Already Have Slimmed Down

With May's big jump in U.S. business inventories, it's clear that inventory-building buoyed economic growth in the second quarter. Many observers, however, believe the buildup was involuntary--that is, it occurred not because producers and sellers were trying to fatten overly thin stocks but because slowing demand left them with more goods than they anticipated. And that suggests that the economy could slow sharply in the second half as producers scale back output to bring inventories back in line.

PaineWebber Inc. economist Maury N. Harris doubts that inventories are much of a problem, however. He notes that retail sales, while down in April and May, were up strongly in June in exactly the areas where retail stocks had been growing. May inventory gains of 1.9%, 1.5%, and 1% posted by the categories of building materials and hardware, general-merchandise stores, and auto dealers, respectively, were followed by sales rises of 2.7%, 1.5%, and 1.3% in June.

Thus, Harris believes that consumer purchases in June probably helped clear out much of the May inventory buildup at the retail level--lessening the chances of a coming inventory correction.

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