The collapse in US inventories indicates the economy is laying the foundation for a return to growth this year.
Stockpiles of long-lasting factory goods declined 0.9% in February after falling 1.1% in January, the biggest two-month slide since 2003, the Commerce Department reported today in Washington. The decrease brought the ratio of inventories to sales down for the first time in seven months.
"There is hope," Stephen Stanley, chief economist at RBS Greenwich Capital in Greenwich, Connecticut, said in a note to clients. "This is exactly the progression that needs to happen, so today’s data represents an important step on the road to recovery."
The report bolstered forecasts that the world’s largest economy will begin to expand in the second half of the year after a likely contraction in the first six months of 2009. Retail sales, residential construction and home sales last month have all been stronger than most economists projected.
"The harsh correction opens the door for an rebound and that should buttress manufacturing beginning in the second quarter," said John Herrmann, chief economist at Herrmann Forecasting in Summit, New Jersey.
In the short term, declines in stockpiles subtract from economic growth, and Herrmann was among economists who lowered their forecasts for gross domestic product this quarter. David Greenlaw, Morgan Stanley’s chief financial economist in New York, projected fewer goods on hand would reduce growth by 2 percentage points from January though March.
The economy contracted at a 6.2% annual pace in the last three months of 2008, the most since 1982, according to figures from the Commerce Department. Tomorrow, the government may revise that decrease to 6.6%, according to the median estimate of economists surveyed by Bloomberg News.
Today’s report from Commerce showed orders for durable goods unexpectedly rose in February on a rebound in demand for machinery, computers and defense equipment. The 3.4% increase was the biggest gain in more than a year and the first in seven months.
Sales of new houses unexpectedly climbed 4.7% to an annual pace of 337,000 last month from a record low in January, the government also reported today. Two days ago, the National Association of Realtors said purchases of existing homes rose 5.1%, also confounding forecasts of a drop.
While the recent spate of better-than-projected readings signals the rate of economic decline is abating, it’s still too soon to say a rebound is imminent.
"We are in a bottoming process," said Ken Mayland, President of ClearView Economics LLC in Pepper Pike, Ohio, who predicts a return to growth in the third quarter. "The economy cannot be a bottomless pit. There is a physical limit to how far things can fall."
Mayland estimates the drag from housing will diminish next quarter, as will the decline in auto output. In addition, the tax cuts and spending programs that were part of the Obama administration’s stimulus plan "will help give the economy some lift" later in the year, he said.
"The economy is transitioning from one level of equilibrium, to a lower level,” Mayland said. “It may be a lot lower, but it’s an equilibrium."