Manufacturing Inventory Growth Outpaced Sales in July

Lackluster consumer demand continues to weigh on the U.S. economy. After learning that wholesalers saw their inventories rise more quickly than sales in July, we now know that manufacturers had the same fate. Manufacturing and trade sales rose by $7.5 billion or 0.7%, while inventories rose by $13.2 billion or 1.0%, according to the Census Bureau. This trend is troubling and may begin to explain why manufacturing jobs were off in August.

First, here's how inventories have changed since 2001:

You can see that the last bar for July 2010 is the highest rise in manufacturing and trade inventories in two years. It's normal for inventories to rise after firms undergo a period where they allow their stock to decline. If inventories increase too much, however, then manufacturers may begin reducing their workforce, as demand isn't matching up with production.

In fact, that's what we began to see in August. Manufacturers reduced jobs by 27,000 after hiring new workers for every other month in 2010. Here's how the industry has done since 2008:

You can see how significant the change in August jobs was for the sector. Manufacturers might have overestimated the demand and consequently over-hired. If inventories continue to rise quicker than sales, then we may see even more job losses in manufacturing until firms are able to better match production to demand.