Consumers v. Inventories

For several months much speculative cash has lain idle waiting till its owners got over speculating on economic trends. Three weeks ago some of the speculators made up their minds and the stockmarket moved tentatively upward without encouragement from industrial production. Last week the market slowly worked its way up past a minor "resistance point"--140 on. the Dow Jones industrial averages (1938 high 158.41; low 98.95)--waited for the sluggish railroad averages to "confirm" by rising from 27.90 to 28.50.

Trying to make headway under present circumstances upset market custom. Resigned to heavy industry stagnation, bulls turned to consumer stocks. Last week they bid up Barren's index of retailing chain stocks to the highest level since the August 1937 bull market. Such perennial market favorites as Chrysler, U. S. Rubber and U. S. Steel were forced to share popularity with stocks which speculators seldom bother with: food stocks--Standard Brands, National Biscuit, Kroger Grocery --even such a market bush-leaguer as Safeway Stores (third in number of stores, second in sales volume among U. S. food chains). Meantime steel, auto, chemical stocks bobbed indecisively up & down.

There are several reasons why the big purveyors of consumers' goods are doing well:

> At the beginning of the 1937 recession, shrewd Sewell Lee Avery's Montgomery Ward management and other big U. S. distributors subordinated profit margins to sales volume, ever since have bargained with inventory-ridden manufacturers to sell them merchandise at recession prices. This contrasts with the practice of many a small retailer who still sits on much of his 1937 inventory which is not yet completely paid for, and still holds out for pre-recession prices.

> The mail-order houses, particularly, by keeping their inventories in line with sales and turning them over rapidly, have succeeded not only in getting volume but in increasing their profits.

> Food chain managements like Kroger's, under its volume-minded President Albert H. Morrill, have been profiting too. They have started abandoning small, high-cost stores, concentrating on larger, more profitable units, also reduced prices.

Speculators have taken these successes as signs of general increase in consumer purchases. Actually the general increase has been small; the mail-order houses and chains have increased profits not because the consumer cake is much bigger but because they have got bigger slices of it. Five months' U. S. department-store sales were up only 3% from last year against combined sales increases for Ward, Sears, J. C. Penney of 15%.

For their low inventories, too, the conspicuous retailing chains are exceptional, not typical. Two important evidences of continued inventory trouble--which augurs more production curtailment instead of imminent recovery--were available last week from 1) the continued fall of the Bureau of Labor Statistics index of all wholesale commodity prices, and 2) developments in the textile and steel industries.

Declining commodity prices almost invariably reflect unliquidated inventories. In 1938, a typical inventory liquidation year, U. S. businessmen held production below consumption while they worked off some 11% of inventories on hand at the end of 1937's overproduction splurge. Prices for the year dropped nearly 9%, uninterrupted by an abortive revival in demand and production in the second half of the year. In nearly a straight line, the commodity price index fell from its year's high, January 13 (81.0), to its low, December 24 (76.6). Price deflation continued into 1939, consumption thriving on declining prices.

Last month the price index snapped back with the stockmarket (TIME, June 5), recovered to 76.4. But allegedly short-inventoried U. S. businessmen did not behave as they normally do when prices rise. Instead of bargain-hunting on the way up by ordering merchandise for future delivery, when prices would presumably be higher, most of them continued to wait. Within a week the index resumed its 1938 habit of declining to a new low each week.

Meantime two major industries, which between them can almost swing the Federal Reserve Production index, showed signs of serious inventory trouble, present or to come. Cotton textile print goods inventories were down 40% on a rush of business from last month's all-time high of 210,000,000 yards, but the industry began to curtail production 25% in order to speed up liquidation of the unwieldy balance. No better a sign was a 20% increase of production in the steel industry (from 45% to 54% of capacity). In 1938 semi-finished inventories in the hands of steel makers increased 11% on falling sales, and warehouse jobbers accounted for 17% of the steel sold. A good part of their purchases went into their inventories. With steel purchases falling off and only 7% of steel capacity needed to produce the estimated fourth-quarter needs of the auto industry (some 1,300,000 tons), the 20% increase in steel operation meant that the producers, too, were adding to inventory. This augurs ill for end-summer activity when production would otherwise have been able to rise moderately without adding to top-heavy inventories.

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