Business sales plunged 2.1 percent in June, the second-largest decline ever, and business inventories rose the most since February, dampening hopes of a robust rebound in the third quarter.
The sales and inventory figures, coupled with the small rise in retail sales in July, provided little evidence to economists that the economy would bounce back strongly through September, as the Reagan administration has forecast.
The administration said it expects the economy to grow at a 5 percent rate in the second half of the year, following the 1 percent growth rate in the first half.
Many economists, including those in the administration, had said they were counting on business accumulation of inventories, in addition to modest growth in consumer spending, to help drive the rebound in the second half of the year. The accumulation of inventories in June was considered somewhat good news because it meant that production was increasing.
However, some economists said that the rise in inventories meant that businesses had overestimated sales and were stuck with unwanted stocks. If the rise in inventories continues without an increase in demand, factories may have to cut back production.
Inventories still are considered lean by historical standards, so factory production is not expected to fall off, economists said. However, most of the increase was at the manufacturing level, which means production may slow or plateau until retailers buy the excess stocks.
Additionally, consumer spending has been weak and is expected to grow at about half the rate that it did in the first half of the year, economists said.
"We haven't been looking for a lot of rebound anyway as far as demand is concerned," said Cynthia Latta, senior economist at Data Resources Inc. "The rebound that we have been forecasting will come from some pickup in inventory accumulation. So we have not been looking for really good sales figures, and we do have some rebound in inventories."
"This is not a positive report for production," Latta said. Activity is "not going to pick up in production industries at all. Inventories have piled up at the manufacturing level. That tends to put some kind of damper on production until retailers buy up those goods." The Commerce report implies "a lot of support for maintaining a plateau of production," Latta said.
Business sales were poor because retail sales dropped in June, Latta said. "Things are not all that positive for consumers," she said. "If you look at sales over the past year, they are still trending up, but consumers have taken on an awful lot of debt and incomes are not rising very fast. For a lot of production workers, their real incomes are eroding very fast."
Second-quarter growth was held down in large part because businesses didn't accumulate inventories, which would have increased sales, Commerce Department chief economist Robert Ortner said.
"We'll probably see a pickup in inventory investment in the third quarter, which should contribute to growth," Ortner said. So long as final sales continue to grow, there shouldn't be a problem of unwanted buildup of stocks, which would lead to production cutbacks, Ortner said.
Regarding the sharp decline in business sales, Ortner said "the key there is really at the retail level. If consumers keep taking the goods off the shelves, it will work its way back down the pipeline" and improve sales at the wholesale level. The problem has been that purchases of goods have gone to foreign firms rather than U.S. companies, he said.
"That's why for the past year we very clearly had much better growth in spending than we have had in output. In the past four quarters, while our domestic spending grew only 3.5 percent, domestic output grew less than 2 percent," Ortner said. "That difference is due to the growing trade deficit."
Business sales dropped $9.11 billion to a seasonally adjusted $419.17 billion in June, following a rise of $1.8 billion, or 0.4 percent, in May to $428.28 billion, the Commerce Department said. The sales decline in June was second only to the 2.8 percent drop in March 1975.
Inventories rose $2.31 billion in June to $580.09 billion, the largest increase since the 0.5 percent rise last February. Inventories declined $2.42 billion, or 0.4 percent, in May to $577.78 billion.