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US wholesale inventories flat, boost to Q3 growth seen modest

[WASHINGTON] US wholesale inventories were unchanged in July as previously reported and sales recorded their biggest drop in six months, suggesting a modest boost to third-quarter economic growth from inventory investment.

An outright drop in inventory investment weighed heavily on economic growth in the second quarter and some economists believe the inventory correction is close to running its course.

The Commerce Department said on Friday that the flat reading followed an upwardly revised 0.3 per cent increase in June. Wholesale inventories were previously reported to have gained 0.2 per cent in June.

"The trend towards an increase of inventories at the wholesale level gives us greater confidence that GDP growth will be well above 2 per cent in the third quarter as factories restart their engines and start to produce the goods to replenish the store shelves," said Chris Rupkey, chief economist at MUFG Union Bank in New York.

The department in its recently introduced monthly advance economic indicators report published last month had estimated that wholesale inventories would be unchanged in July.

The component of wholesale inventories that goes into the calculation of GDP - wholesale stocks excluding autos - was also unchanged in July.

Following the report, the Atlanta Federal Reserve trimmed its third-quarter GDP estimate by two-tenths of a percentage point to a 3.3 per cent annual rate.

"The forecast of the contribution of inventory investment to third-quarter real GDP growth decreased from 0.62 percentage points to 0.57 percentage points after this morning's wholesale trade report," it said.

Inventories subtracted almost 1.3 percentage points from GDP growth in the second quarter, the largest drag in more than two years, restricting the rise in output to an anemic 1.1 per cent pace. They have weighed on GDP growth since the second quarter of 2015 as businesses sold stockpiles of unwanted goods, helping to undercut manufacturing activity.

In July, wholesale stocks of farm products fell 2.0 per cent after increasing 2.8 per cent in June. Wholesale inventories of petroleum declined 1.2 per cent, while stocks of automobiles rose 0.4 per cent.

Sales at wholesalers fell 0.4 per cent in July, the biggest drop since January, after jumping 1.7 per cent in June. Sales were weighed down by a 3.5 per cent drop at petroleum wholesalers, as well as a 0.3 per cent fall in auto sales.

At July's sales pace it would take wholesalers 1.34 months to clear shelves, up from 1.33 months in June. While the ratio has declined from 1.37 months touched in January, which was the highest since March 2009, it remains relatively high.

As a result, some economists caution that inventories could still be a drag on output in the third quarter.

"The inventory headwind for GDP continues, as inventory-to-sales ratios remain stubbornly high," said Michael Englund, chief economist at Action Economics in Boulder, Colorado.