period. in the second quarter of this year, businesses accumulated inventory stocks at a rapid pace, after having kept inventories relatively lean for several years. this acceleration in the pace of accumulation could mean that inventories had finally gotten too lean and that firms wanted to re - stock, or it could mean only that businesses were startled by the unexpectedly weak pace of demand for their products and that inventories piled up unintentionally. answering this question is important for determining what is likely to happen to inventory building for the rest of the year. how do we begin to gauge whether businesses wanted to rebuild inventories in the second quarter? one way is to look at the ratio of inventories to sales. in the nonfarm sector, this ratio has fallen nearly 25 percent in the past fifteen years, from 2. 59 months ’ supply to 1. 97 months ’ supply. most likely this secular decline represents improvements in inventory management, possibly related to better technology. in 2003, the inventory - sales ratio fell especially sharply, dropping from 2. 02 to 1. 94, or about 4 percent. part of the decline likely reflected improvements in inventory - management techniques. however, unless the pace of technological change has improved markedly, the drop in the inventory - sales ratio probably also reflected sales outstripping the cautious expectations of businesses. the implication is that inventories may have been a bit on the lean side in the first part of this year. if so, then some of the inventory accumulation in the second quarter may have been an intentional re - stocking of inventories that had become too lean. survey results from the institute of supply management support this conjecture. for several years, a majority of respondents had said that their customers ’ inventories were too low. the most recent data, however, suggest that many supply managers have reassessed that view, and the mix of those who think customers ’ inventories are lean has moved more in line with those who think stocks are excessive. thus, the recent upturn in inventory investment does not seem to be pointing toward another problematic inventory cycle, with its accompanying need to drastically reduce production to eliminate unwanted stocks. at the same time, the bulk of stock rebuilding appears to be behind us so that inventories are unlikely to be a major spur to gdp growth in the near future. conclusions today, i have highlighted some of the issues that continue to challenge economists in evaluating the outlook for business investment, an extremely important element in determining the outlook for the economy more

. consequently, we cannot know with certainty the level of the existing capital that is still available to be used. second, we do not know how much capital firms would ideally like to employ because their expectations and production processes are always changing. of course, we can estimate both actual and desired capital stocks, but these estimates are quite dependent on our assumptions, especially our assumptions about technological change. based on the depreciation rates used by the bureau of economic analysis, we estimate that the growth rate of the capital stock of equipment and software slowed from around 7 percent in 1999 and 2000 to about 2 - 1 / 2 percent in 2002, a slowdown large enough to substantially shrink most estimates of the capital overhang. the final factor that complicates the outlook for equipment and software spending stems from the tax code. currently, the partial - expensing provision in the tax law allows a firm to subtract a large fraction of the cost of new capital equipment from profits right away, rather than depreciating the cost over time, and thereby to lower its taxes. the partial - expensing provision, which provides an incentive to invest in new capital goods, will expire at the end of this year. the impending expiration is probably boosting investment spending in the second half of this year as firms rush to take the tax advantage before it disappears ; however, at this point the evidence is not conclusive. the anecdotal evidence on whether firms are responding to the partial - expensing provision is sparse and somewhat contradictory. according to a summary of commentary on current economic conditions prepared by the san francisco fed in september, a number of contacted firms planned increases in capital spending, yet there was no mention of partial expensing. in contrast, a recent special question in the philadelphia fed ’ s business outlook survey showed that about one - quarter of respondents thought that the tax provision was likely to boost their spending this year. the statistical evidence for a tax response is also inconclusive. shipments of long - lived equipment ( which should be more favorably affected than demand for short - lived equipment ) have increased more than overall capital spending since the passage of the most recent version of the partial - expensing law - the pattern we would expect to see if businesses were taking advantage of the tax incentive. however, other explanations for this pattern are possible, and the difference between the long - lived and the short - lived categories is neither statistically significant nor terribly robust. the evidence