Action in the Three-I League

Businessmen keep a sharp eye on a trio of supremely important and closely related factors that make up the economy's three-I league: inflation, inventories and interest rates. When businessmen start building up their inventories at a rapid pace, they have historically helped bring on inflation, which the Government then seeks to curb by boosting interest rates and slowing down the economy. The current economic expansion has been long-lived and steady precisely because inventories have stayed lean, prices stable and credit free and easy. Last week, however, there were rumblings, rumors and signs of concern on all three fronts.

Overworked Steelmen. The Commerce Department reported that inventories generally continue to run at a modern-day low, averaging only $3 worth of goods on the shelves for every $2 worth of monthly sales, and that production rose faster than stockpiles in August. But business psychology--that elusive but important factor in gauging the economy's course--has undergone a subtle change as a result of the auto labor settlements (see Labor). More than 25% of the nation's purchasing agents report that they have started to stock up in expectation of a series of generous wage hikes and price increases after the election, as well as continuation of good business and heavy demand well into next year.

Partly as a result of corporate hedging against inflation, backlogs of unfilled orders have jumped smartly in the metals industries. Inventories of steel are running close to 20% higher than a year ago because users in the auto, appliances and can industries are converting their plentiful cash and credit into stockpiles as a defense against price rises or the possibility of a steel strike next May. The overworked steelmakers have stretched out many delivery times to four months and have pushed production to a two-year high of 81% of capacity--and would be producing even more were it not for a shortage of skilled labor so acute that 3,000 steel jobs are open in the Chicago area.

Inflationary Flutters. Such strong demand is added temptation for the steel makers to post a long-sought price hike after the election--especially when fears of inflation do not seem to be deterring other industries from raising prices. In the past few weeks, prices have increased for copper, zinc, tin, chemicals, paper and rubber. Viewing all this, and perhaps anxious to test a harbinger of overall rise, U.S. Steel and Inland Steel last week increased by 17% the price of the reinforcing bars widely used in construction.

These inflationary flutters are keenly felt by the sensitive and watchful Federal Reserve Board, and they serve in general to make the board less reluctant to risk an economic slowdown by stepping up interest rates. Lately it has issued warnings about that possibility in the hope of talking businessmen out of overbuying, or boosting prices too much. Though the board is usually as secretive and unpredictable as the CIA, broad hints that it may soon tighten money were voiced last week by three insiders--the presidents of the New York and Cleveland Federal Reserve banks and the board's economic advisor, Guy Noyes. Chairman William McChesney Martin Jr. seemed somewhat more sanguine. Said he: "Actually, the price situation is healthy today except for an incipient tendency of some prices to break out on the plus side." Martin means that prices are beginning to rise, and to judge whether that and the increased stockpiling mean the start of inflation, he and his colleagues will "reappraise" the board's easy-money policies within a month.

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