By Emily Kaiser
WASHINGTON, April 15 (Reuters) - First, U.S. consumers cut out all but essential spending. Then came the business retrenchment. The next stage will be recovery, and while the recession probably has a bit further to run, the pieces are falling in place for a bounce, albeit a modest one.
A record amount of the U.S. industrial base was sitting idle last month, data released on Wednesday showed, evidence that businesses were busily purging inventory and manufacturers were selling goods on hand before producing more.
At the rate they're moving, they should soon be able to get ahead of falling demand. Eventually, people will want to buy more stuff, which means factories will have to make it, and that will help get the economy growing again.
"We're setting the stage for an inventory cycle, and after a period of decumulation there is likely to be a period of accumulation," Lawrence Summers, a top economic adviser to President Barack Obama, said in an interview with Bloomberg television this week.
"The sense of unremitting gloom in the statistics two months ago has given way to a more balanced feel."
Inventory cycles are a common feature of recessions. When demand dries up, businesses logically cut back. But the current one has been unusually deep, reflecting intense economic fear that has shattered consumer and corporate confidence.
Deep downturns are often followed by sharp recoveries, but there are reasons to believe that this time around the rebound could lack pep.
Consumers have cut back so far that there will be some pent-up demand. But with unemployment likely to keep rising into 2010, consumer spending probably won't return with much gusto.
There is also the risk that if companies misread a pick-up in consumer demand as a sign of a more lasting recovery, they may rebuild stockpiles too fast, triggering another painful correction.
Then there is the question of how quickly the rest of the world emerges from a global recession. The latest readings on U.S. trade showed a modest improvement in exports, but if that proves fleeting it would put another drag on factory growth.
Still, there is reason to believe the worst may be over.
Consumers did most of their belt-tightening in the fourth quarter, which marked the deepest spending decline, said Nariman Behravesh, chief economist at IHS Global Insight. The business response was apparent in the first quarter in the form of steep manufacturing cuts and job losses.
"Summers is right on the (inventory cycle) process. He may be a little optimistic in terms of timing," Behravesh said.
"The bottom in terms of the economy is probably three or four months away. We're approaching it. Businesses are getting a better handle on their inventories right now but that still means that they're a few months away from actually restocking."
DIG THROUGH THE NUMBERS
The Federal Reserve said on Wednesday that the amount of the nation's industrial capacity being used for production hit an all-time low of 69.3 percent in March. In other words, about 30 percent of nation's industrial space isn't being used.
But one of the most striking elements of the report was that it showed output actually increased in the auto sector, which was pushed to the brink of bankruptcy as consumers balked at big-ticket purchases and financing evaporated.
The auto industry's March sales met or beat Wall Street's expectations, and many economists were optimistic that demand had bottomed. That would bode well for auto manufacturing.
Indeed, the auto sector has been far more aggressive in cutting inventory than other manufacturing segments. Commerce Department data released on Tuesday showed that the inventory of autos and parts in February was down 13.9 percent from a year earlier. For all businesses, the year-over-year decline was just 3.5 percent.
But that report also showed even as businesses aggressively pared inventory, they were struggling to get ahead of falling demand. The February inventory-to-sales ratio, a measure of how long it would take to deplete inventories at the current sales pace, dipped only slightly to 1.43 from 1.45 in January. A year earlier, it stood at 1.29.
Aaron Smith, an economist with Moody's Economy.com, said that while there were signs the "industrial carnage" will lessen soon, April's data bears close watching.
The New York Federal Reserve's April survey of the state's manufacturing offered an optimistic sneak peek on Wednesday, showing activity contracted far less severely than in the prior month. The business conditions index hit its highest mark since September, when the collapse of Lehman Brothers ushered in an even deeper recession.
"While this does not point to an outright rebound in manufacturing, it does suggest that the rate of decline will start to moderate this (second) quarter," Smith wrote in a note to clients. "Naturally we would hope to see some confirmation of this in tomorrow's Philadelphia Fed manufacturing survey." (Editing by Andrea Ricci)