Business Inventories in August Decline 0.4%; Biggest Drop in 2 Years

Business inventories dropped 0.4% in August, the biggest decline in more than two years, as consumer demand, especially for automobiles, outdistanced the ability of firms to restock, the government reported Tuesday.

The Commerce Department said the value of goods on shelves and backlots dipped to a seasonally adjusted $577.9 billion in August following a 0.1% increase in July.

The decline, the steepest since a 0.6% fall in March, 1983, came as business sales were advancing 1.6% in August.

Economists said the inability of businesses to restock shelves fast enough to keep up with demand should translate into production and jobs.

More Hiring Expected

“Businesses will start to build up inventories again, and, when that happens, we will finally see the long-awaited gains in production and employment in the manufacturing sector,” said Michael K. Evans, head of a Washington consulting firm. “That is what we will need to convince everybody that the second leg of the recovery has finally started.”

The government will release on Thursday its revised estimate for overall economic growth in the July-September quarter. Evans predicted that the original projection of 2.8% annual growth during this period will be revised to 3.8% growth.

He said the final three months of the year would show an even stronger 5% growth rate.

Robert Ortner, chief economist for the Commerce Department, said that the low level of inventories in relation to sales should ease fears that the sluggish economy was in danger of tumbling into a recession.

“There have been some comments that the economy is heading for a recession in 1986, but the symptoms just aren’t there,” he said. “This economy looks more like young middle age rather than old age.”

Strong Retail Sales

The 1.6% gain in sales, which put the August total at $429.1 billion, was led by a 2.3% jump in sales at the retail level. A preliminary report showed that retail sales in September climbed an even stronger 2.7%. Both advances came from a big jump in auto sales as consumers responded to attractive cut-rate financing packages offered by dealers.

Outside of the retail level in August, sales by manufacturers were up 1.1%, and sales at the wholesale level rose an even stronger 1.7%.

The 0.4% drop in inventories was led by a 0.9% decline in stocks at the retail level. By far the biggest drop was a 3.6% decline in inventories at auto dealerships.

Inventories fell 0.2% at both the wholesale and manufacturing levels.

With sales rising and inventories falling, the inventory-to-sales ratio declined to 1.35 in August from 1.37 in July. This meant that it would take 1.35 months to deplete inventories at the August sales pace. This was not far from the record low point for the inventory-to-sales ratio of 1.3 months in January, 1984.