Smaller business inventories and increased sales are good signs in a recession. Economic data released today show the first has already happened and the second appears to be happening.

Consumer products and basic materials shares gained on the news, up +1.2% and +1.5%, respectively, in midday trading as the overall market was flat.

The Commerce Department said this morning that business inventories -- unsold goods and the raw materials used to make them -- fell -1.0% in May, the ninth consecutive monthly decline. The reading was roughly in line with expectations for a -0.8% decline.

The drop was led by a -1.6% decrease in retail inventories. Manufacturers and wholesalers’ inventories recorded smaller declines.

May inventories were enough to last for 1.42 months, down a fraction from 1.43 months' worth of supply in April.

Changes in inventory levels reflect expectations for future business activity. In a recession, inventory declines are a good sign. They typically reflect a relative uptick in sales and, by extension, predict future orders to replace what was sold.

Overall business sales in May were down -0.1% from April. Manufacturers' business was off -0.9%; retail trade rose +0.5% and wholesalers saw a +0.2% increase.

The Commerce Department has already said that retail sales for June rose +0.6%.

StreetAuthority

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