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WASHINGTON - Unsold goods are piling up in US warehouses as the housing meltdown and soaring oil prices strain consumers, raising fears that already glum fourth-quarter growth prospects may tip towards recession.
Federal Reserve chairman Ben Bernanke warned last week that economic growth would slow from the third quarter's surprisingly strong 3.9 per cent annual rate. But recent data on inventories suggests the slowdown may be even more severe than the central bank has anticipated.
Wholesale inventories rose 0.8 per cent in September, far greater than the 0.2 per cent gain that analysts had expected, according to Government data released last week. That is likely to boost third-quarter growth even more, but take a toll on the current period as businesses work off the unsold goods. The Institute for Supply Management's closely watched report on manufacturers told a similar story for October. ISM's survey this month showed manufacturers were increasingly worried about customers' inventory levels, with stockpiles growing in sectors ranging from plastics and rubber to food and tobacco.
"The main source of concern at this point is how this inventory build will unwind in the fourth quarter," Merrill Lynch analyst David Rosenberg said.
He estimated that revised third-quarter GDP data would show an extra US$18 billion ($23.9 billion) in inventory. An equal amount might be erased from the fourth quarter, which would take his GDP forecast "perilously close to flat, or even negative".
Ordinarily, an inventory build-up is seen as a temporary imbalance that the world's biggest economy can quickly digest. But with consumer confidence sliding and recession fears mounting, this inventory spike raises questions about demand.
Douglas Lee, chief economist for research group Economics from Washington, said determining how the current episode would play out was tricky because economists had few tools to gauge how tightening credit would ultimately affect spending.
Until recently, Lee had expected the economy to grow by 1.5 per cent in the fourth quarter. Now he thinks it will grind to a halt, in part due to swelling inventories, and he expects only modest progress in the first quarter.
"A negative growth rate in the fourth quarter is quite possible," he said. Although one quarter of contraction might not meet the recession criteria, "recession risk is rising and recession talk will fill the news".
Lee said some of the third-quarter inventory increase was tied to car makers bracing for possible labour strikes, and those cars would probably be sold off in the coming months.
But inventories also rose in many other categories, suggesting consumption was weaker than expected. That may be tougher to overcome as consumers grapple with a housing recession, steep energy costs and tightening credit terms.
Strong export sales made up for some of the domestic weakness last quarter, but Lee said it was unlikely the pace would be sustained.
Jan Hatzius, an economist with Goldman Sachs, noted that ISM's customer inventories index jumped to 54.0 in October from 50.0 a month earlier, putting it at the highest point since January 2001 - two months before the last recession began.
In the retail sector, 70 per cent of chain stores posted weaker-than-expected October sales.
- Reuters
