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Chart Of The Day

DOES THE INVENTORY CYCLE MEAN A V-SHAPED RECOVERY?

From Bloomberg:

Companies in the U.S. are slowing the pace of inventory reductions after a “dramatic” drawdown, setting the stage for a surge in stockpiles that will strengthen economic growth this quarter, say economists at Oscar Gruss & Son Inc.

“We’ve just started to form a V, and we expect it to extend up sharply,” said Michael Shaoul, chief executive officer at New York-based Oscar Gruss. “Businesses had been just very traumatized and nervous about a decline in demand, and they’re starting to get over that. We have every reason to believe that economic growth is going to get stronger from this point on.”

The CHART OF THE DAY shows the turning point in business inventories. While stockpiles continued to drop from July to September, the reduction of $130.8 billion at an annual pace was smaller than the record decrease of $160.2 billion in the second quarter. The smaller decline contributed 0.94 percentage point to growth last quarter.

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With inventories running lean, manufacturers will boost production as demand stabilizes. That makes it likelier they will start hiring again.

“We have a turn in the process, and it’s going to drive improvement in other economic metrics,” Shaoul said. “As businesses start to rebuild inventories, they’re going to have to go out and hire more people,” he said.

The economy expanded at a 3.5 percent annual pace in July through September, the Commerce Department said yesterday, snapping four straight quarters of contraction.

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