Inventories Rise; Production Cutbacks Expected

“The implication is that production is going to slow some more in the second half of the year,” said economist Bruce Steinberg of Merrill Lynch Capital Markets in New York.

“It could imply a small inventory correction in the second half,” said James Annable, an economist at the First National Bank of Chicago.

The May business activity produced a slight increase in the ratio of inventories to sales. It was 1.5, meaning it would take 1 1/2 months to exhaust inventories at the May sales pace. The ratio was 1.49 in April and 1.51 in March.

Analysts noted that the buildup was most felt in the retail area, where the economy has slowed the most as the Federal Reserve tightened credit to contain inflation. Inventories were up 0.9%, compared to a sales decrease of 0.1%.

“I’m starting to wonder whether retailer inventories are getting out of hand,” said Michael Niemira, an economist at Mitsubishi Bank in New York. “The numbers suggest they’re growing a little too fast.”

The automobile industry, which has seen new car inventories swell, already has reduced production at some factories. The Commerce Department said auto inventories rose 0.9% in May while sales dropped 1.8% from April.

But even without the automobile category, inventories rose 0.9% in May.

Other major inventory increases were noted at department and clothing stores, Steinberg said. Overall, general merchandise inventories rose 2.2%.

All categories showed increased inventories in May, however.

In addition to the 0.9% increase in the retail area, manufacturers’ backlogs were up 0.6% while wholesalers’ buildup was 0.8%. Inventories were 8.1% above the level in May, 1988.

Wholesalers registered the only sales increase in May, up 0.5%. Manufacturers’ sales fell 0.2% and retailers’ were down 0.1%. Sales rose 8.2% over May of last year.