The Inventory Drop

To U.S. businessmen, one of the prime reasons for the recession is the sharp dip in inventories. Last week the Commerce Department's figures showed just how sharp the cutbacks have been.

In the early part of 1957's fourth quarter, manufacturers shifted from increasing inventories at a $2.4 billion annual rate to cutting them at a $1.2 billion rate, thus producing an overall $3.6 billion production cut for the economy. Then the recession accelerated rapidly. In November and December, said Commerce, manufacturers chopped inventories more than $300 million each month, almost doubling the production cuts. Wholesalers cut orders so sharply that inventories tumbled $300 million, bringing their annual reduction rate to $3.6 billion. Retailers slashed their inventories so fast that store stocks plummeted $1.9 billion in barely 30 days. On an annual rate, the fantastic cutbacks would reduce U.S. retail stocks (currently $23.4 billion) to almost zero by the end of 1958. As a result of the cutbacks, the Federal Reserve Board industrial production index dropped three points to 133 in January.

No one knows when the inventory slide will hit bottom. Yet the cuts have been so drastic that few businessmen think they can continue much longer. Steelmen, operating at less than 60% of capacity, are making so little steel that first-quarter production may actually fall some 5,000,000 tons short of consumption, even with the big drop in steel use in Detroit. January auto sales were the most disappointing since 1954 with only 381,000 new cars delivered--down 22.6% from December. Ford Motor Co., after record 1957 sales of $5.8 billion (with profits of $282 million), was off an estimated 30%; Chrysler Corp., with record 1957 sales of $3.5 billion (and profits of $120 million), tumbled an even sharper 34%, dropping back to 14% of the market. General Motors' sales dropped only 11%, and G.M. jumped up to 56% of the market v. 46% last year. Nevertheless, the industry's overall sales were so far behind production that dealers' stocks rose to 825,000 by Jan. 31, almost 35% more than the total last year at the same time.

As for sales of soft goods, they were still so strong that the U.S. Commerce Department reported January sales ahead of a year ago. All told, said Commerce, U.S. retailers did $15.5 billion worth of business last month to start off 1958 with the greatest selling spree in history and a new record 5.4% better than last year's peak.

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