Ahead of the Bell: Business Inventories

WASHINGTON (AP) — Businesses likely increased their stockpiles in October after underestimating demand in September. The rebound in inventory building should help boost economic growth in the final three months of the year.

Economists expect businesses increased their inventories by 0.5 percent in October, according to a survey by FactSet. The Commerce Department will release the report at 10 a.m. Eastern time Tuesday.

In September, businesses stopped building their stockpiles for the first time after 20 consecutive monthly gains. Many businesses had worried that consumer demand would fall after the little growth in the first half of the year.

Yet the economy grew at an annual rate of 2 percent over the summer, even after companies cut their inventories. The key reason for the growth was consumers — their spending grew at triple the rate from the spring. Overall business sales rose 0.6 percent in September, the fourth consecutive gain.

With depleted stockpiles and higher demand, economists expect a modest rebound in inventory growth in the final three months of the year. Last week the Commerce Department said wholesale inventories grew in October by the most since May. Manufacturing inventories also rose for that month.

Tuesday's inventory report will be more complete. It will include stockpile growth at the manufacturing, wholesale and retail levels.

When companies build up their inventories, it usually signals that they expect more sales. And the extra factory production needed to increase stockpiles boosts economic output.

Rising inventories are a big reason economists expect growth will improve in the fourth quarter. Most expect the economy to expand by an annual rate of about 3 percent, up from 2 percent in the July-September quarter.

But the U.S. economy is vulnerable to shocks from overseas. European leaders are struggling to contain a two-year old debt crisis and the 17 nations that use the euro may already be in recession, economists say. A recession in Europe could slow U.S. exports and reduce growth next year.

During the Great Recession, businesses cut back inventories in the face of plunging demand. The restocking that has occurred over the past two years has been a major support for the economy as factories have increased production to meet rising orders.