updated 12/12/2008 10:32:20 AM ET 2008-12-12T15:32:20

Businesses facing a record drop in sales reduced their inventories in October by the largest amount in five years, another sign the recession likely will force further cuts in production.

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The Commerce Department reported Friday that businesses slashed the inventories they were holding on shelves and back lots by 0.6 percent in October, three times the 0.2 percent decline economists expected. It was the biggest cut in inventories since August 2003.

The reduction in inventories came as business sales fell by a record 3.5 percent during the month, even larger than the 2.4 percent drop in September sales, which had been the previous record.

Sales were down at all levels of the supply chain in October and inventories were reduced by all groups as well. The biggest cut in inventories was a previously reported 1.1 percent drop in stockpiles held by wholesalers. Inventories held by manufacturers fell by 0.6 percent and retail inventories were down 0.1 percent.

The concern is that the current recession, already the longest in a quarter-century, will force further production cutbacks in the months ahead. That would cause a continued downward spiral of weakness, with unemployment rising further as factories lay off more workers in the face of falling demand.

The ratio of inventories to sales rose to 1.34 in October from 1.30 in September, meaning it would take 1.34 months to exhaust current stockpiles at all levels of the supply chain. That was the highest ratio since it stood at 1.35 in June 2003.

The cutbacks in inventories reflect the deteriorating conditions for consumers, who have been cutting back on their spending for months. A separate report Friday showed that retail sales fell for a record fifth straight month in November.

Traffic at malls remained sluggish last week as retailers increase their promotions in an effort to draw in consumers.

Copyright 2008 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.


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