Business inventories fell 0.4 percent in August, the sharpest drop in more than two years, the Commerce Department reported yesterday.
The strong inventory decline reflected strong consumer demand, concentrated in automobile sales, that cut into the stock on businesses' shelves, economists said. It was the sharpest monthly decline since a 0.6 percent drop in March 1983. Inventories increased 0.1 percent in July.
The decline in inventories could mean that businesses will increase production and employment in coming weeks to build their stocks back up, economists said. That would help increase the nation's output of goods and services -- gross national product -- in the fourth quarter of this year.
However, economists also cautioned that most of the increase in production and sales recently has been concentrated in the automobile sector, which has boosted sales through cut-rate financing incentive programs. These programs caused people to buy cars now rather than later, which may reduce automobile activity in coming months.
Already, domestic auto sales have declined 10.1 percent in the beginning of this month compared with a year ago, the seven major American auto makers said yesterday. The car makers attributed the decline to the end of cut-rate financing plans for auto buyers to clear out leftover 1985 models.
So far, General Motors Corp. and Ford Motor Co. have reinstituted limited incentive programs for fear of a precipitous decline in sales following even deeper discounts that ended Oct. 2.
"The auto industry is as much a part of the economy as any other sector," said Robert Ortner, Commerce Department chief economist. "It looks like the auto industry, having moved a tremendous number of cars, probably borrowed from their future business in the coming months, because consumer spending has gone up much more than the incomes, and so has borrowing."
Ortner said that personal savings rates are at all-time lows while consumers' debt burdens are at all-time highs, which will mean slower consumer spending in the future. "Consumer spending is going to slow down, and that's not unimportant since it's two-thirds of GNP," Ortner said.
The economy will have to rely on increased homebuilding, inventories and capital spending rather than automobiles for future growth, Ortner said.
Joseph Carson of Merrill Lynch Financial Services said that the drop in inventories by businesses is "setting the stage for a gain in production in the coming months if final demand strengthens. . . . In the fourth quarter, inventories will be a positive source of growth."
However, Carson said that he didn't "see much incentive to build inventories in other sectors because sales are soft."
"The retail sector outside of automobiles is still seeing soft sales," he said, and some retailers may have to cut prices to get rid of inventories. "The manufacturing sector is a long way away from having a strong broad-based advance."
Retailers showed the greatest change in inventories with a decline of 0.9 percent in August, Commerce said. Total durable goods inventories dropped 0.5 percent, and nondurable goods stocks were at about the same level in August as in July, Commerce said.
Business sales declined 1.6 percent in August. Durable goods sales rose 3.2 percent. Retailers had the largest change in the durable goods group, with sales increasing 4.6 percent. Wholesalers' durable goods sales increased 3.2 percent, while those of manufacturers rose 2.7 percent, Commerce said.
Total nondurable goods sales changed little from July to August, according to Commerce.
On the automotive front, Chrysler Corp. reported a year-to-year sales gain by selling 39.2 percent more cars during the Oct. 1-10 industry reporting period than it did during the same time last year.
Chrysler's sales incentive program lasted three days longer than GM's and Ford's.
GM's sales declined 14.8 percent during the first 10 days of this month, and Ford's dropped 23.7 percent. American Honda Motor Co. Inc. had a 35.7 percent sales decline, while American Motors Corp. sales fell 32.5 percent and Volkswagen of America Inc. had a 43.3 percent sales increase.
Sales for the Oct. 1-10 period totaled 202,002 units compared with 224,792 a year earlier. At a seasonally adjusted annual rate, sales were 6.7 million, less than half the rate of late August and September, when the cut-rate financing programs were going strong.