Growth's Albatross: Inventory Rebound By MARK GONGLOFF

When businesses dumped inventories ruthlessly during the depths of the recent recession, it made the bad economy worse. But there was supposed to be a silver lining: a quick restocking would make the recovery stronger. Those hopes are still unfulfilled. A fresh read on inventories of manufactured goods—among the most sensitive to the economy's ups and downs—will come on Tuesday, when the Institute for Supply Management releases its November manufacturing indexes. The ISM's inventories index for the past four months has bounced back from a deep trough to its highest level since August 2008. The index is still below 50, meaning inventories are still vanishing. That has been the case since 2006. What matters for the economy is the pace of inventory reduction. If inventories merely shrink more slowly quarter to quarter, then gross domestic product growth benefits. Inventories are being depleted more slowly now, but that hasn't helped growth as much as economists had hoped. Inventories added 0.9 percentage point to third-quarter GDP growth. But they subtracted 2.4 and 1.4 percentage points, respectively, from the first and second quarters. If inventories soar from here, then growth will benefit. But there is little sign that is going to happen. The gap between the ISM's indexes of new orders and inventories has slipped from a 34-year peak in August to a level just above its long-term average, indicating less appetite to gear up production and risk boosting inventories. Meantime, the ratio of inventories to actual shipments of durable goods is still high, at 1.76, compared with a 10-year average of about 1.5, according to the Commerce Department. This suggests inventories are still high relative to demand. The ISM also asks manufacturers to assess customer inventory levels. In October, 63% said customer inventory levels were "about right," highest since August 2008. This suggests little need to move the needle in either direction. More broadly, as long as final demand is anemic, crimping revenue, businesses will keep squeezing costs, notes MFR Inc. chief U.S. economist Joshua Shapiro. Having already slashed payrolls to the bone, inventories make fat targets for future cost-cutting.