The Problem of Inventories

Among the forces that buffet the U.S. economy, few have preoccupied economists more than the way in which U.S. merchants and manufacturers manage their inventories. Fortnight ago, the errant ways of inventory buyers came under the cold eye of the Joint Congressional Economic Committee. Historically, fluctuations in inventory buying have accentuated swings in the business cycle: in a recovery, businessmen help to create inflation by rapidly building up their inventories, and in a recession they contribute to unemployment by cutting back sharply on their orders. "Investment in inventories," lamented the Joint Committee's economic experts, "has been perverse in timing and magnitude."

By the time the committee hearings ended, the Congressmen had heard plenty of conflicting suggestions on what to do. The most drastic proposal was that businessmen be taxed on changes in their inventory levels; this made scant sense, since every businessman already stands to save money if he can stabilize his inventory. At the other extreme was Federal Reserve Board Chairman William McChesney Martin, who argued that "inventory fluctuation is symptomatic rather than fundamental," hence any attempt to influence inventory policy directly would be pointless.

Missing Motives. All this probing comes at a time when U.S. businessmen seemed to be managing their inventories more smoothly than ever before. Since the economy began to turn up again 17 months ago, inventories have been growing at a far less rapid pace than in previous recoveries. The rate of increase in inventory buying has actually declined every month since last January; in May, total business inventories rose only $170 million (to $97.4 billion), the smallest increase in nine months.

Businessmen are building up their stocks more slowly nowadays because two of the old motives for heavy inventory accumulation are missing: 1) there is little need to order from suppliers long in advance, since industry is operating well below capacity; 2) there is less pressure to buy now as a hedge against future price rises because inflation is less of a threat. More and more firms are gearing their inventories more closely to sales by using computers to make speedier sales projections. Computer projections have enabled one division of American Radiator & Standard Sanitary Corp. to get along with 10% less inventory.

Lost Fat. So far. only a minority of U.S. companies use computers this way. When a majority get around to it, the average size of business inventories (which has declined from 47 days' supply on hand six years ago to 44 days' supply now) should be cut further. For the economy as a whole, this should be all to the good. Though cautious inventory buying has contributed to the sluggishness of the latest recovery, it may make the next downturn less severe, because businessmen will have less inventory fat to work off before they must start stocking up again.

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