U.S. wholesale inventories fell unexpectedly in January and sales hit their highest in more than a year, suggesting businesses will soon need to begin restocking, which would support economic growth.
Wholesale inventories slipped 0.2 percent after a 1 percent drop in December, the Commerce Department said on Wednesday. Economists had expected stocks of unsold goods at U.S. wholesalers to rise 0.2 percent in January.
U.S. financial markets were unmoved by the data, however.
Some analysts trimmed their first-quarter U.S. gross domestic product growth estimates since the data showed rising demand was still being sated in part by inventories rather than new production.
Still, they held to their views that inventories will make a big contribution to growth in the current quarter as businesses turn to rebuilding stocks.
Even with our GDP forecast revisions, we assume a still hefty boost from inventories that should account for nearly all of the first-quarter (GDP) gain, said Mike Englund, chief economist at Action Economics in Boulder, Colorado. Englund lowered his first-quarter growth forecast to a 2.3 percent annual rate from 2.6 percent.
In the fourth quarter, a slowdown in the rate at which businesses were liquidating inventories contributed nearly 4 percentage points to the economy's 5.9 percent growth rate.
When businesses increase inventories or slow the rate at which they are selling them off, they need to meet more demand out of current production, which lifts gross domestic product.
The pickup in sales also suggested demand was firming after the worst recession in decades.
Sales at wholesalers rose 1.3 percent, the 10th straight increase, to $346.7 billion in January -- the highest level since October 2008. Analysts had expected a 0.7 percent gain.
The jump in sales pushed the inventory-to-sales ratio, a measure of how long it would take to sell stocks at the current sales pace, to a record low of 1.10 months' worth from 1.12 months in December.
WHOLESALERS CLOSER TO RESTOCKING
Although companies have been increasing orders to replenish inventories, they have not been able to keep up with the sales pace, said Bernard Baumohl, chief global economist at The Economic Outlook Group in Princeton, New Jersey.
It will lead to further orders and more production and hopefully additional hiring down the road.
The slowdown in the frenzied pace of inventory liquidation played a major role in stabilizing the economy following its worst downturn since the 1930s. Economic growth, helped by government stimulus, resumed in the second half of last year.
However, there are worries the recovery could stall when the boost from inventories and government stimulus fades.
Officials from the Federal Reserve -- the U.S. central bank -- meet next week and are expected to hold overnight interest rates in a range of zero to 0.25 percent and maintain a pledge to keep them ultra-low for an extended period to nurse the recovery.
A Reuters survey published on Wednesday showed GDP growing at a 2.6 percent rate in both the first and second quarters, before picking up to a 2.8 percent pace in the last three months of this year.
Separately, the Mortgage Bankers Association's index of mortgage applications increased 0.5 percent last week, reflecting increased demand for home purchase loans even as mortgage interest rates trekked higher.
If demand for purchase loans, a tentative early indicator of home sales, continues to climb it will bode well for the housing market, whose government-led recovery has suffered a setback in recent months.
(Additional reporting by Julie Haviv in New York; Editing by James Dalgleish)