RISING INVENTORIES

Warning Flags, But No Danger

TO experts charting the U.S. economy, no short-range factor is more vital or volatile than business inventories. Economists estimate that see sawing inventories have been responsible for more than a third of the cyclical changes in U.S. industrial output between 1919 and 1946. Both the 1948-49 and 1953-54 downturns were "inventory recessions." They were caused by the fact that businessmen, worried by slipping sales, cut back their orders--and thus cut production --far more than the actual drop in sales. In the space of a few months during the 1953-54 recession, there was a whopping $7 billion shift in inventories (from an accumulation rate of $4 billion to a liquidation rate of $3 billion). Last week inventories were high again. They have jumped an estimated $2 billion since Jan. 1, are now at an alltime record $84 billion v. $82.1 billion at the end of last year.

Despite the high level, few economists or businessmen are seriously alarmed. Though inventories currently total 20% of the U.S. output of goods and services, most experts think they are needed to supply an expanding economy. In 1939 about $20 billion worth of inventories was adequate; in 1956 the U.S. needs four times as much to make sure that booming consumer demand is satisfied. With fore casts of a gross national product of $403 billion for 1956 (up $16 billion from 1955), inventories will creep still higher to keep pace with future sales. Moreover, because of increased distribution efficiency, the all-important ratio of inventories to sales has been dropping, reducing the danger of overloading. While the 1939 manufacturers' inventory level was enough for 2.1 months of sales, 1955's level was down to an average 1.6 months. So far in 1956, the inventory-sales ratio is holding stable at 1.53 months v. 1.68 months at the start of 1955.

The only real sore spot is autos. As of March 1, U.S. auto dealers had record stocks of 904,220 unsold cars, 341,565 more than March i, 1955. In other industries, however, inventories are well in line with sales. Chicago radio and TV manufacturers are increasing inventories 10% to 20% to keep up with sales boosts as high as 183% in some areas. In the South, clothing firms, drugmakers and other small manufacturers report rising sales, say they are also increasing inventories because of expected price rises. With steel, copper and aluminum suppliers booked solid well into midyear, West Coast aircraft, electronics, and other manufacturers are building up go-day inventories of scarce metals to protect themselves. As for retailers, Southern California apparel-and department-store inventories are up 9% to 12% in response to a 7% sales increase.

What worries economists far more than what they know about current inventories is what they do not know. The basic monthly figures collected by the Commerce Department report the "book value" of inventories, i.e., at current prices, in manufacturing and in wholesale and retail establishments.

But there is no uniform reporting system. Businessmen are trying to revamp reporting procedures, but at best the system gives only inventory value in relation to current prices, pays little attention to the actual volume of goods. Thus, the inventory dollar figures often show disturbing month-to-month fluctuations as a reflection of price changes, although the physical volume may remain fairly stable.

Businessmen also complain that inventory reporting by the Government is too slow to be helpful. On manufactured goods, the information first comes out in preliminary figures from 1,500 manufacturing firms (40% of total production), at least 25 days after the end of the month; some 30 days later another report, this time with revised figures from 2,500 firms (about 50%) is released, while the only complete report covering 4,000 companies (70%) is issued once a year. Though manufacturers' reports are usually accurate, the inventory figures from wholesale and retail sources are so poor that even the Commerce Department itself advises against using them to spot overall trends.

To many businessmen the biggest worry is the lack of any inventory forecast to help them keep the pipeline pumping out goods smoothly. At best the current statistics tell only where inventories have been, not where they are going, and thus what effect future buying will have on prices and sales. The Commerce Department and the Securities & Exchange Commission manage to get forecasts of business investment in new plants and equipment, while the Federal Reserve makes a regular sampling of consumer purchasing plans. Businessmen think that the Government should also devise a way of forecasting shifts in inventory policy. This would not only guide businessmen who do the ordering (and take the beating if they guess wrong) but would also give economists one of the best ways of telling whether business is going up or down.

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