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Wholesale inventories drop most since September 2011

Consumers shop at a Costco Wholesale store. (Getty)

Consumers shop at a Costco Wholesale store. (Getty) Credit: Consumers shop at a Costco Wholesale store. (Getty)

U.S. wholesale inventories fell in May by the most in a year and a half, the second straight monthly decline and a sign that restocking by businesses could weigh against economic growth in the second quarter.

The Commerce Department said on Wednesday wholesale inventories dropped 0.5 percent during the month, confounding the expectations of analysts polled by Reuters, who expected an increase.

The data led many economists to cut their forecasts for economic growth in the April-June period, which was already expected to come in below the lackluster 1.8 percent annual rate posted in the first quarter. Deep federal budget cuts are holding back growth by trimming wages for government workers.

Yet despite ever-darker views of economic output around mid-year, policymakers and Wall Street economists appear confident the fiscal pain will prove transitory.

Employers also seem to see better days ahead. Data last week showed relatively robust hiring in June, raising expectations the economy was healing quickly enough for the Federal Reserve to begin paring back monetary stimulus later this year.

"While upcoming U.S. GDP data will continue to show a fairly weak picture, ... the jobs market is healthier," said Richard Gilhooly, an interest rate strategist at TD Securities in New York.

Wednesday's data highlighted how bumpy the road to economic recovery could be this year. The decline in inventories in May was the sharpest since September 2011. The government also revised its estimate for inventories in April to show a 0.1 percent decline rather than a previously reported modest increase.

Inventories are a key component of gross domestic product changes. Economists at Macroeconomic Advisers, a respected forecasting firm, cut their estimate for second-quarter economic growth by a half point to a 0.7 percent annual rate. The firm sees a return to much stronger growth by the end of the year.

The declines in inventories during May were broad based, from long-lasting manufactured goods to groceries and farm products. The fall in durable goods stocks was the largest since December 2009.

However, sales were stronger than expected during the month, rising 1.6 percent.

Prices for U.S. government debt and stocks fell as traders awaited the minutes from the June Federal Reserve policy meeting, which will be released later on Wednesday.

In recent weeks, interest rates have been rising sharply as the Fed prepares to reduce its extraordinary monetary stimulus.

Last week, mortgage rates rose to their highest level in two years, depressing demand from potential homeowners, data from an industry group showed.

Interest rates on fixed 30-year mortgages rose for the ninth week in a row to average 4.68 percent in the week ended July 5, the Mortgage Bankers Association said. It was the highest level since July 2011 and a 10 basis point increase over the week before.

The surge in costs had been expected to push some undecided buyers into the market as they rush to lock in rates before they rise even more, but the MBA's seasonally adjusted gauge of loan requests for home purchases fell 3.1 percent, the second straight week of declines.

Rates have been rising since early May, and the increase accelerated after comments from Fed Chairman Ben Bernanke last month that the U.S. central bank expects to wind down the pace of its quantitative easing program later this year if the economy improves as expected.

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