By Lucia Mutikani
WASHINGTON (Reuters) - U.S. wholesale inventories were unchanged in July as previously reported and sales recorded their biggest drop in six months, suggesting a modest boost to third-quarter economic growth from inventory investment.
An outright drop in inventory investment weighed heavily on economic growth in the second quarter and some economists believe the inventory correction is close to running its course.
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The Commerce Department said on Friday that the flat reading followed an upwardly revised 0.3 percent increase in June. Wholesale inventories were previously reported to have gained 0.2 percent in June.
"The trend towards an increase of inventories at the wholesale level gives us greater confidence that GDP growth will be well above 2 percent in the third quarter as factories restart their engines and start to produce the goods to replenish the store shelves," said Chris Rupkey, chief economist at MUFG Union Bank in New York.
The department in its recently introduced monthly advance economic indicators report published last month had estimated that wholesale inventories would be unchanged in July.
The component of wholesale inventories that goes into the calculation of GDP -- wholesale stocks excluding autos --was also unchanged in July.
Following the report, the Atlanta Federal Reserve trimmed its third-quarter GDP estimate by two-tenths of a percentage point to a 3.3 percent annual rate.
"The forecast of the contribution of inventory investment to third-quarter real GDP growth decreased from 0.62 percentage points to 0.57 percentage points after this morning's wholesale trade report," it said.
Inventories subtracted almost 1.3 percentage points from GDP growth in the second quarter, the largest drag in more than two years, restricting the rise in output to an anemic 1.1 percent pace. They have weighed on GDP growth since the second quarter of 2015 as businesses sold stockpiles of unwanted goods, helping to undercut manufacturing activity.
In July, wholesale stocks of farm products fell 2.0 percent after increasing 2.8 percent in June. Wholesale inventories of petroleum declined 1.2 percent, while stocks of automobiles rose 0.4 percent. Sales at wholesalers fell 0.4 percent in July, the biggest drop since January, after jumping 1.7 percent in June. Sales were weighed down by a 3.5 percent drop at petroleum wholesalers, as well as a 0.3 percent fall in auto sales.
At July's sales pace it would take wholesalers 1.34 months to clear shelves, up from 1.33 months in June. While the ratio has declined from 1.37 months touched in January, which was the highest since March 2009, it remains relatively high.
As a result, some economists caution that inventories could still be a drag on output in the third quarter.
"The inventory headwind for GDP continues, as inventory-to-sales ratios remain stubbornly high," said Michael Englund, chief economist at Action Economics in Boulder, Colorado.
(Reporting by Lucia Mutikani; Editing by Andrea Ricci)