Smaller Inventories

Most economists agree that there will be no strong turnaround in the economy until business stops living from hand to mouth and starts building up its inventories again.

This week there were signs that the worst in inventory liquidation--which reached a phenomenal annual rate of $9 billion--may be over. The Commerce Department reported that while there was "no clear evidence that inventory liquidation is slowing," sales and production have steadied. The history of previous recessions shows that once sales steady, inventory liquidation comes to an end (see chart). Wholesale and retail sales moved ahead in April, are expected to show a slight drop for May. If they hold steady for a few months, economists hope that the cut in inventories will end.

But the buildup is likely to be slow and cautious. For some time businessmen have tended toward lower inventories because heavy inventories are expensive and improved transportation and increased industrial capacity have made materials easy to get. Many retail stores are ordering smaller quantities more often, getting by with a 30-day or 60-day supply instead of the 90-day supply they might have carried a few years ago. Manufacturers are doing the same. Steel customers are buying more of their steel from warehouses instead of directly from the mills, even though prices are as much as 30% higher, because the customer can save money in processing and storing costs. Small inventory is another byproduct of recession, but any real upsurge in sales would send businessmen scrambling to the producers for more goods.

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