US Inventories Bulge as Consumption Trails GDP

By , Staff writer of The Christian Science Monitor

SHOES from Korea. Toasters from France. Hondas from Japan.

Yes, imports are flooding into the United States. But some of them are gathering dust - sitting in warehouses as inventory.

That's one of the conclusions economists have drawn from Friday's report that the nation's gross domestic product (GDP) rose by a 3.7 percent rate in the second quarter.

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The Commerce Department statistics show that second-quarter consumption was up by 1.2 percent, while inventories - including domestic goods - soared. According to Commerce Department numbers, business inventories grew at a $27.9 billion annual rate. ``It sometimes is a sign of an aging expansion, but we are not sure if it represents a peak in the economy,'' a department spokesman says.

A ``fair amount'' of the inventory accumulation, however, is imported goods, says economist Donald Ratajczak with the Georgia State University Economic Forecasting Unit. The slowdown in sales of imports may reflect the lower-valued US dollar, which makes the price of imports more expensive.

The Commerce report shows that the capital goods sector remains one of the strongest areas for the economy. Capital goods rose by 7.7 percent in the second quarter, after a 18.6 percent rise in the first quarter. Economists say this points to faster capacity growth and productivity gains in the future.

Despite the strong capital goods orders, economists continue to expect the economy to slow down in the third quarter to a 3 percent growth rate. ``The US economy appears to be slowing down to a sustainable pace,'' says Donald Straszheim, chief economist for Merrill Lynch & Co.

However, Bob Dederick, chief economist for the Northern Trust Company in Chicago says the fourth quarter could bounce back, stimulated by the strong auto sector. Last week, US automakers reported record second-quarter earnings.

Economists don't think the second-quarter GDP numbers are likely to change the Federal Reserve Board's policy. ``I still think they will move [the interest rate] up a notch at their next meeting [Aug. 16],'' Mr. Ratajczak says.

The catalyst for the Fed could be a strong July employment report, due out on Friday. The government reported Thursday that initial unemployment claims dropped by 59,000.

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