Published: Wednesday, 14 Oct 2009 | 10:27 AM ET

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U.S. business inventories fell by a bigger-than-expected 1.5 percent in August, the largest fall since last December and the 13th consecutive month of decline, according to a government report on Wednesday that showed businesses were still slashing stocks of unsold goods to cope with weak demand.

Inventories also dropped 1.1 percent in July, slightly larger than the 1 percent initially estimated.

But sales by manufacturers, wholesalers and retailers rose 1 percent, reflecting a big boost from the government's Cash for Clunkers program in August.

While retail sales dropped in September, dragged down by the end of the clunkers program, businesses may begin rebuilding depleted store shelves after more than a year of inventory cuts. If that occurs, factory production will begin to rise and help bolster a broad recovery from the worst recession since the 1930s.

The ratio of sales to inventories declined to 1.33 in August, from 1.36 in July. That means it would take 1.33 months to exhaust inventories at the August sales pace, only slightly higher than August 2008 inventory to sales ratio of 1.30.

Forecasters for the National Association for Business Economics said this week they expected inventories would be trimmed by $97.3 billion this year in inflation-adjusted terms after a reduction of $25.9 billion in 2008. But for 2010, they expect stockpiles to increase by $10.5 billion.

A swing to inventory rebuilding should bolster growth in the nation's gross domestic product starting with the July-September quarter. Auto companies got a jolt from the clunkers' sales incentives which boosted sales in August.

Ford Motor

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[F  Loading...      ()   ] on Tuesday reached a deal to alter its contract with the United Auto Workers union that will help Ford keep its costs in line with rivals General Motors and Chrysler. GM and Chrysler already received union concessions as those two companies dealt with severe financial troubles that forced them to go into bankruptcy protection for a brief period.

Factories hold about one-third of all inventories, wholesalers hold about 25 percent and retailers hold the rest.

In August, manufacturers cut inventories 0.8 percent, retailers reduced them 2.3 percent and wholesalers by 1.3 percent. Sales in August rose for both retailers and wholesalers, but dipped 0.3 percent for manufacturers.

Inventories have fallen for 13 straight months, the longest stretch since they dropped for 15 consecutive months in 2001 to 2002, a period that covered the last recession.

—Reuters contributed to this report

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