Inventories Rise for a 16th Month : Indicators: Analysts say July figures show a drag on economy, as manufacturers had to limit production.

From Reuters

Stocks of unsold goods piled up steadily in July, the government said Monday, a sign that businesses were having trouble bringing inventories into line with generally soft sales.

Inventories held by all businesses grew 0.3% to a seasonally adjusted $962.83 billion in July, the Commerce Department said, the 16th consecutive monthly increase. The rise followed a revised 0.4% increase for June.

Analysts said the inventory "overhang" was a drag on the economy as it forced manufacturers to keep a lid on production. But they also noted an encouraging sign in the report: Retailers made progress in clearing store shelves, which could allow for production to pick up later in the year.

The report fits a pattern of mixed economic news that will confront Federal Reserve Board policy-makers when they meet Sept. 26 to weigh another cut in interest rates. The Fed, the nation's central bank, cut short-term rates for the first time in nearly three years in July.

Many analysts expect the Fed to hold rates steady next week.

"The inventory situation continued to deteriorate in July," said economist Lynn Reaser of First Interstate Bancorp in Los Angeles.

Economist Roseanne Cahn of CS First Boston in New York said the excess inventories were slowing the pace of economic activity.

"What's happening is that the overall environment is fairly sluggish, which means that even though companies are trying hard to keep their inventories under control, it's a real struggle," Cahn said.

Manufacturers' inventories rose 0.6% in July to a seasonally adjusted $412.45 billion, while wholesalers' stocks of unsold goods grew 0.9% to $252.12 billion.

Retail inventories dropped for a second month in a row, falling 0.7% to a seasonally adjusted $298.25 billion.

"This backup at the wholesale and manufacturing level is a real concern," Reaser said. "It's the major reason that manufacturing employment continued to fall in July."

Reaser said she continues to believe that the unwanted bulge in inventories--tied mainly to a sharp drop in the pace of consumer spending in the second quarter--will be worked off in the current quarter.

Indeed, the Fed reported last Friday that companies manufacturing everything from cars to furniture and home appliances managed to push production rates up sharply in August.

In July, though, the Commerce Department said total business sales fell a sharp 1.2% to a seasonally adjusted $674.95 billion after a 0.7% June gain.

Weaker July sales were no surprise; they partly reflected lower shipments of new cars as auto makers closed plants in July to install new machinery and tooling for 1996 models. There were similar shutdowns in the textile industry.

The combination of lower sales and more unsold goods pushed the inventory-to-sales ratio--a closely watched measure of how long it would take to sell existing stocks at the month's sales pace--up to 1.43 months' worth in July.

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