Warning Signals

One of the U.S. economy's more reliable indicators of future trouble is the mercurial behavior of business inventories--unsold goods on industrial, wholesale and retail shelves. Before every postwar recession--in 1948, 1953, 1957 and 1960--inventories have soared like Icarus only to plunge as businessmen liquidated their stocks. Right now, some familiar warning signals are flying.

Last week the Commerce Department reported that inventories swelled at the precarious rate of $16.4 billion a year during the final quarter of 1966, thus breaking a record set during the Korean War. The resulting $135 billion inventory stockpile already is forcing manufacturers to cut production to avoid a glut of unsold autos, appliances and television sets.

Layoffs & Shutdowns. Automakers, with sales 18% below their 1966 pace so far this year, are hardest hit. American Motors last week began a ten-day total shutdown, idling 12,000 employees in Grand Rapids, Milwaukee and Kenosha, Wis. General Motors has laid off 4,760 people at six assembly plants. Ford, with 30,000 employees already working a week shortened to as little as three days, last week trimmed production further and announced it will furlough 2,000. Chrysler scheduled a week's shutdown for two plants next week.

Since Christmas, Hotpoint has laid off 500 refrigerator-production workers in Chicago. General Electric shut down its television-manufacturing lines at Syracuse for this week, idling 4,400. At Westinghouse's Metuchen, N.J., color TV plant, 600 employees have been laid off since December; the company's Columbus, Ohio, appliance plant has cut back from three shifts to one. The Federal Reserve Board reported last week that the nationwide sag in retail sales persisted in January, while its index of overall industrial production fell by a full point to 157.9% of its 1957-59 average. Factory orders for durable goods dropped by a worrisome 5.1%, to the lowest level in 15 months, as the downturn spread to transportation equipment, primary metals and even machinery. "The economy," said Treasury Secretary Henry H. Fowler in the understatement of the week, "has moderated very substantially."

Only "Stagnation." The critical question is whether the inventory shrinkage, which is spotty so far, will widen into a sharp downtrend before easier credit and federal deficit spending again pump up business--and prices. Many economists expect the inventory gain to slip to an annual rate of about $9.5 billion during the first three months of this year. Even so, few predict anything worse for the economy than what Leon Keyserling, former chairman of the White House Council of Economic Advisers, calls "a period of stagnation." With federal, state and local government spending on the rise, with housing starting to recover from its 1966 slump, with unemployment low and incomes continuing to grow, most analysts figure the economy will move ahead firmly in the second half of the year.

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