$35.8 Billion Leaner

$35.8 Billion Leaner

Copyright 2003, Traffic World, Inc.

A sharp drop in inventories restrained otherwise vigorous economic growth in the third quarter but underscored supply-chain gains that are boosting long-term productivity and competitiveness, a leading industry economist says.

Companies slashed inventories by $35.8 billion in the third quarter, compared with a $17.6 billion decrease in the second quarter and $4.8 billion in the first. Inventory reduction kept the growth of the gross domestic product to 7.2 percent. If inventories had not been cut so sharply, GDP would have risen an estimated 7.87 percent, according to the Commerce Department.

That''s not necessarily bad news. The inventory reduction reflects improvements in supply-chain management that have chopped days from delivery cycles, said Gene Huang, chief economist for FedEx Corp.

Over the past 10 years the inventory-to-sales ratio has dropped from 1.5 or higher to about 1.4, he said. "The 1.4 ratio means you have about 1.4 months of inventory at the end of the month," Huang explained. "That reduction from a 1.5 ratio in the last decade translates into two to three days gained each month."

A surge in exports also fueled third-quarter growth, Huang said. The comparatively low value of the dollar, which depresses the cost of U.S. goods overseas, helped boost exports 9.3 percent, an impressive increase from the second quarter, when overseas shipments declined 1 percent.

Imports rose only 0.1 percent compared with 8.8 percent in the previous quarter.

Business spending on equipment and software increased 15.4 percent, up from a second-quarter rate of 8.3 percent - a sign that businesses are becoming more confident about their economic outlook.