U.S.cautious consumers slow spending in June(69627)

Inventories Rise as Retail Sales Sag

U.S. retail sales declined in June while more goods piled up on business shelves in May, underscoring a dilemma facing the U.S. economy.

Up to now, the recovery was fueled in large part by businesses rebuilding inventories depleted during the recession. But that process can't continue if consumers cut back on spending, as now appears to be happening.

The Commerce Department reported Wednesday that retail sales fell 0.5% in June from May, the second month in a row that sales declined.

And in a separate report, the Commerce Department said business inventories rose for the fifth consecutive month in May, up 0.1% from April.

Inventories usually grow when the economy is expanding-as businesses prepare for stronger sales in the months ahead. But when that outlook darkens, those businesses can get stuck with unwanted goods.

Many businesses are still adding stocks, but gathering signs that economic growth will be softer than expected in the second half of the year could make them reverse course.

"Growth has clearly stepped down from the first quarter," said Zach Pandl, an economist at Nomura Securities.

He now estimates that gross domestic product grew at a 2.3% rate in the second quarter, down from the 2.6% he was looking for before Wednesday's reports.

Although retail spending started the year strong, persistently high unemployment and a declining stock market in recent months have dragged down consumer confidence, and sales have faltered.

Sales in June were driven lower by a 2.4% drop in automobile sales as well as a 2% decline in gasoline-station sales, likely due to a decline in fuel prices.

In one gauge used by economists to assess the underlying trend in consumer spending, sales excluding autos dealers, service stations and building materials and supply stores, rose 0.2% after falling in April and May.

The inventory trend could be seen through activity at U.S ports, where large quantities of imported goods enter the country. At the ports of Long Beach and Los Angeles, the volume of shipping containers coming off ships was 30% higher in June than a year ago. Both ports receive a large share of Asian goods entering the U.S.

That, in turn, has helped to fill the vast network of warehouses that receive and process those imports in a region of southern California east of Los Angeles known as the Inland Empire.

In Mira Loma, Calif., Cargo Cats Inc. President John Rojas has a warehouse brimming with boxes destined for Wal-Mart Stores Inc., Ross Stores Inc. and other retailers. His main warehousing unit is now operating at about 90% of capacity, he says, up from about 60% of capacity in September.

He hired an additional full-time employee and five temporary workers last week to handle the increased workload. Friday was the busiest day of the year so far, and Mr. Rojas says he worked a 15-hour shift helping to load inventory onto wooden pallets and forklift them into the warehouse.

"Over the last month we've seen a 30% increase," he says.

But if U.S. consumer spending keeps slowing, this influx could become an economic albatross.

When retailers' inventories run too high, they typically respond by cutting prices to clear stock off shelves, which can drag down profits. They cut orders, too, and that leads their suppliers to lower production and lay off workers.

That likely would occur only if spending falls sharply, said MF Global economist Jim O'Sullivan. Inventory levels remain low by historic standards, he points out. Total inventory levels in May were just 1.24 times sales, up slightly from the record low of 1.23 they hit in April.

Still, the boost to economic growth delivered by companies that raised their inventories "has probably largely run its course," he said.

Some companies already worry they have too much stock on their shelves. Steven Dunn, chief executive of Munchkin Inc., a North Hills, Calif. baby-products company, said sales were "gangbusters" in the first quarter and he was optimistic that the increases would continue.

But during the second quarter, business fell off and some of his customers have begun cutting orders and pushing back planned promotions.

At Munchkin, the upshot is that inventories are now running $2 million or $3 million higher than Mr. Dunn would like.

But he say he isn't in a panic. Having too much product up to a point at least protects him from the risk of increases in orders that he might not be able to meet without resorting to expensive air-freight shipments from China.

"Cutting back too much is fraught with danger," he said. "Our penalty for not being in stock is tremendous."

Some companies still say their inventory levels are too low. General Motors, for instance, opted to forego its traditional two-week summer shutdown in late June and early July at nine of its 11 U.S. plants to build inventory levels.

Dealers were complaining they weren't getting enough of certain models.

"The biggest complaint we have is a lack of inventory in terms of the hot sellers," said Scott Barley, manager Barley Automotive, a GM dealership in Sainte Genevieve, Mo.

"We're trying to convert people over from Toyota, but until we have vehicles on dealer lots you're not going to."

U.S.cautious consumers slow spending in June

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