Plummeting U.S. Inventories Will Extend The Recovery

U.S. capital goods spending is accelerating. Shipments of core capital goods in March rose 2.2%, higher than February’s 1.5%.


Growth in core capital goods shipments, a direct input into equipment investment in the GDP accounts, measured 7.4% annualized in the first quarter, only a small step down from the fourth quarter’s 8.7%.


Yet at the same time, U.S. inventory levels are encouragingly coming down.

Very little of the acceleration in demand for capital goods appears was due to restocking. The monthly data show a shift toward increases in core capital goods inventories in the first two months of the first quarter. However, inventories fell sharply in March, and so far the turn has lagged the increase in shipments. Consequently, the inventory/sales ratio for core capital goods has continued to decline and is now close to prerecession norms.

More broadly, with demand from both consumers and businesses surprising to the upside in the first quarter, inventories remain lean, and the restocking cycle is in its early stages. The need to bring inventory growth in line with sales means that the inventory cycle in coming months will continue to boost demand and production above the pace of final sales.


Capital goods spending represents business confidence in the sustainability of the U.S. recovery. Should it continue, it will have knock-on effects throughout the economy, from manufacturing to transportation and jobs.

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