THE ECONOMY : July Business Inventories Increase 0.6%; Sales Fall 0.9%

Business inventories climbed 0.6% in July, the biggest gain in three months, while total business sales fell by 0.9%, the Commerce Department reported Friday.

While the combination of falling sales and rising inventories would normally spark recession fears, analysts for the most part dismissed the report.

“The rise in business inventories is potentially a problem, but when it is taken in context with other data, it is not very worrisome,” said Allen Sinai, chief economist of Boston Co.

Supporting this view, the Federal Reserve, meanwhile, reported that industrial production posted a 0.3% increase in August, the best showing in four months, reflecting a rebound in production at auto plants.

Moderate Gains Expected

Economists said this increase in industrial output, along with a rise in retail sales in August, was an encouraging sign that factories would not scale back production plans for fear that output was getting ahead of demand.

Many analysts believe that outside the auto industry, inventories have been kept at fairly lean levels, and they predict that overall production will post moderate gains for the rest of the year.

For July, the 0.6% rise in inventories, the largest since a 0.9% May increase, pushed the total stockpile of unsold goods to a seasonally adjusted $785.5 billion.

It was led by a 1.1% rise in inventories held by manufacturers. Inventories at the retail level rose 0.3%, while wholesale inventories were unchanged.

The 0.9% plunge in total sales matched a similar decline in February and was the largest sales setback since a 3% drop in January, 1987. The July decrease left total sales at a seasonally adjusted level of $511.09 billion

Retail Sales Strong

Sales at the manufacturing level fell by 1.8% while sales by wholesalers were off 0.8%.

Retail sales were the only area of strength, rising 0.5% in July. In an indication of further improvement, the government said Thursday that retail sales in August were up 0.7%, reflecting a surge in auto sales.

The combination of falling sales and rising inventories pushed the ratio of inventories to sales to 1.54 in July, meaning that it would take 1.54 months to exhaust inventories at the July sales pace.

August’s production rate represented an increase over revised figures showing increases of 0.1% in July and 0.2% in June. Production was flat in May, after rising 0.7% in April. (The Fed originally reported that production rose 0.2% in July after falling 0.1% in both May and June.)

The Fed credited almost all the August growth to a rebound in auto factories and coal miners returning to work after a strike.

“Excluding motor vehicles, output of both consumer goods and business equipment was sluggish during the summer,” it said.

At the same time, the Fed said the operating rate of factories, mines and utilities remained unchanged at 83.8% of capacity in August. The operating rate measures not only output but also changes in productivity levels.

Factory use had declined 0.1 percentage point in June, the Fed report said, after reaching a 10-year high of 84.3% in December, 1988, and last January. Last month’s operating rate also was unchanged from August, 1988.

Operating Rate Up

The Fed said its industrial production index in August stood at 142.4% of its 1977 base, up from 142% in July.

At the same time, the operating rate rose 0.1 percentage point to 84% at manufacturing plants. The rate had peaked at 84.7% in January.

The rate at factories producing durable goods--big-ticket items expected to last more than three years--rose 0.2 percentage point to 82.6%. The rate at factories producing non-durable goods fell to 86.1% in August from 86.4% in July.

“Unchanged capacity utilization in August signals the likelihood that inflationary pressures have declined substantially in the last several months,” William K. MacReynolds, forecasting director of the U.S. Chamber of Commerce, said.