WASHINGTON U.S. wholesale inventories jumped more than expected in September, suggesting output will remain soft through year-end as businesses try to trim stocks.
Inventories surged 1.5 percent after an upwardly revised 1.2 percent gain in August, the Commerce Department said on Tuesday. Analysts polled by Reuters had been expecting a 0.7 percent increase.
The rise in inventories in September matched a July gain that was the biggest percentage increase in more than two years.
A rebuilding of inventories from record low levels has been a key driver of the economy's recovery from the worst recession since the 1930s, but as the economy cooled over the summer, inventories began piling up on businesses shelves.
The government last month said inventory building contributed 1.4 percentage points to the economy's annualized 2 percent growth in the third quarter.
Analysts said the rise in September suggested inventories may have contributed even more to growth than previously estimated, implying a slight upward revision to GDP.
However, the relatively lofty level of stocks suggests producers may be more inclined to hold the line on output as 2010 winds down since businesses will be better able to meet demand with goods they have on hand.
"Given higher inventory levels, stock building will likely begin to slow through the remainder of the year, which should exert a modest drag on fourth-quarter GDP growth," Scott Anderson and Michael Brown, economists at Wells Fargo Securities, said in a research note.
Financial markets largely ignored the data.
A separate report showed that small businesses in October planned to cut inventories and keep workforces trim.
Despite an uptick in optimism, small businesses remained braced for a sluggish economy, the report from the National Federation of Independent Business showed. The business lobby group said its small business optimism index rose 2.7 points to 91.7 in October, the third straight monthly rise.
"Unless consumer spending picks up, the demand for new inventory will remain weak," the group said.
Sluggish sales lay behind September's inventory gain, with wholesale sales increasing a smaller-than-expected 0.4 percent. Analysts were expecting a 0.6 percent increase.
The inventory-to-sales ratio, which measures how long it would take to clear shelves at the current sales pace, rose to 1.18 months' worth at September's sales rate, up from 1.17 months in August and the highest in 10 months.
A loss of momentum in the U.S. recovery prompted the Federal Reserve last week to launch a controversial $600 billion round of bond buying to provide additional stimulus.
A Reuters survey found economic growth forecasts had not moved much since the Fed announced its initiative.
Economists anticipate the world's largest economy will grow at an annualized 2 percent pace in the fourth quarter and expand at a sluggish 2.3 percent next year, measured fourth quarter over fourth quarter.
More broadly, growth prospects across the world were also unchanged after the U.S. central bank's intervention.
Critics of the Fed's hotly debated policy say it will do more to lift already soaring asset prices than growth.
However, economists polled by Reuters said more Fed bond purchases provide insurance against the risk of another sharp U.S. slowdown, and should underpin growth in the rest of the rich world, even with a weaker dollar.
In a sign of some business optimism, two large companies announced higher-than-expected quarterly profits on Tuesday.
Industrial conglomerate Tyco International Ltd TYC.N and Rockwell Automation Inc (ROK.N) both said they expect demand to pick up as the recovery gains traction.
(Reporting by Mark Felsenthal and Nancy Waitz in Washington, Nick Zieminski and Chris Reese in New York, and Scott Malone in Boston; Editing by Andrea Ricci)