Wholesale inventory hits two-year low

WASHINGTON (Reuters) -- Stocks at U.S. wholesalers plummeted 1.7% in June, the tenth straight monthly drop, which drove inventories to their lowest level in more than two years, Commerce Department reported Tuesday.

The magnitude of the drop in inventories from May was nearly double the 0.9% decline analysts polled by Reuters had expected. May's drop was revised to 1.2% from the originally reported 0.8%.

U.S. stocks added to losses after the data and U.S. Treasury prices posted session highs as investors worried businesses were cutting inventories sharply because they remained skeptical about a return in demand.

"The drop in inventories suggests that businesses continue to be cautious and that production is below demand," said Alan Gayle, senior investment strategist at Ridgeworth Investments in Richmond, Va., suggesting it could be a factor in an economic recovery. "Most analysts are expecting inventory cuts to slow over the third quarter and it looks as though that hasn't materialized."

Businesses have been trimming inventories during the longest U.S. downturn since the Great Depression. In June, wholesalers' stocks stood at $393.93 billion, the lowest level since $393.49 billion in January 2007.

Sales rose 0.4%, the second straight increase, which pushed the inventory-to-sales ratio down to 1.26 months' worth from May's 1.28 months'. It was the lowest ratio since October's 1.21 months'.

However, sales were down 21% from a year earlier, according to the Dept. of Commerce, while inventories were off 10.3%.

Durable goods, which make up nearly two-thirds of wholesale inventories, were down 1.5% in June, while their sales were up 0.7%.

Stocks of autos and parts fell 1.2%, while their sales rose 4.5%.