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U.S. inventories fall
August 15, 2001: 10:14 a.m. ET

June unsold goods down 0.4%; July industrial output off 10th month in row
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NEW YORK (CNNfn) - Inventories at U.S. businesses fell in June, while industrial output fell in July for the 10th straight month, according to separate government reports Wednesday that painted a mixed picture of the health of the world's largest economy.

Inventory levels fell 0.4 percent from May to about $1.2 trillion in June, the Commerce Department reported, after falling a revised 0.2 percent from April to May. Economists surveyed by expected inventories to fall 0.4 percent from May to June.

Meanwhile, sales fell 1.4 percent to $829.2 billion, the Commerce Department said, pulled down by a 2.8-percent drop in manufacturing sales. June's total sales number had its largest decline since a 1.5-percent drop in August 1992. Sales rose 0.9 percent in May.

Separately, the Federal Reserve reported industrial production fell 0.1 percent from June to July, compared with a 0.9 percent plunge from May to June. Economists surveyed by expected production to fall 0.3 percent.

"Although inventory rebalancing is well underway, weak sales and elevated inventory-to-sales ratios will keep downward pressure on industrial production and manufacturing employment," said Steven Wood, economist with FinancialOxygen. "This situation is unlikely to improve until spending accelerates."

After the news, U.S. stocks opened little changed while U.S. Treasury bond prices edged down.

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Federal Reserve Chairman Alan Greenspan has attributed much of the economy's weakness to an effort by businesses to cut back quickly on production to bring inventories back in line with sales.

A year-long economic slowdown has curbed Americans' appetite for goods, causing an inventory pileup. To reduce inventories, companies have laid off workers, reduced shifts and deeply discounted merchandise.

Economists say companies must pare excess stocks in order to lay the foundation for increased production in the future, something that would bode well for a comeback for the overall economy.

Stocks of unsold goods at manufacturing levels were down 0.7 percent, Commerce said.

The stock-to-sales ratio, which measures how long it would take firms to sell down existing inventories, stood at 1.43 months, up from 1.42 months in May.

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To keep consumers spending and avoid a recession, the Federal Reserve has slashed its target for short-term interest rates six times this year, from 6.5 percent to 3.75 percent. Many economists predict another rate cut when the Fed meets Tuesday.

So far, the U.S. has avoided a recession, defined as two consecutive quarters of shrinking gross domestic product (GDP). Economists thought Wednesday's falling inventories data, combined with data on the U.S. trade imbalance with other countries due Friday, could shrink government estimates for second-quarter GDP, possibly sinking it into negative territory.

"These [inventories] data are weaker than the Commerce Department assumed in its advance second-quarter GDP report," Wood said. "By themselves, they will subtract nearly 0.5 percent from the 0.7 percent initial GDP estimate."

The industrial output data were slightly better news for GDP strength, since they showed the beleaguered manufacturing sector, which has borne the brunt of the year-long slowdown, may be stabilizing.

"It is still too early to call the end of the manufacturing slump because the stability of July output might be little more than a seasonal effect," said Ian Shepherdson, chief economist with High Frequency Economics Ltd. Still, he said, "this report probably means the worst is over."

Factory output, the biggest component of production, was flat in the month, the first time since September of 2000 it has not posted a drop.

Industry capacity in use fell to 77.0 percent in July from a revised 77.2 percent in June. That was the lowest rate since August 1983, when it also posted a 77.0 rate. Economists surveyed by expected capacity utilization of only 76.6 percent. graphic

- from staff and wire reports


U.S. retail sales flat in July - Aug. 14, 2001

U.S. wholesale inventories dip - Aug. 8, 2001

NAPM index shrinks in July - Aug. 1, 2001

2Q GDP at 0.7 percent, weaker than expected - July 27, 2001

U.S. trade gap shrinks in May; leading indicators rise - July 19, 2001

U.S. inventories unchanged in May - July 16, 2001

Fed cuts interest rates a quarter point; sixth cut in 2001 - June 27, 2001


Inventories report

Industrial production report

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