Rolling with the Punches

From the Commerce Department came some disquieting news: according to the latest figures (July), manufacturers as a group have stopped adding to inventories.

The rush to replenish inventories after the steel strike was one of the factors that got the year off to a good start, caused a hefty $900 million increase in inventories in January. But because of business caution--and better inventory controls (TIME, July 11)--many manufacturers, especially those who overstocked, have been steadily cutting down each month on what they buy for their inventories.

In July, reported the Commerce Department, inventories showed a net decline of $200 million (to $54.9 billion), thus breaking through the no-purchase point for the first net decline in nine months. What this means is that inventory buying has all but dried up, and that manufacturers are making their sales from the shelf, eating into their backlogs. It also means that new orders are down (by 2% in July); they have dropped more sharply below manufacturers' new sales, which declined only slightly in July.

Dark Side. The drop in inventories is a foreboding sign to pessimists. For one, companies that are using their shelf stock to meet sales will eventually have to replenish their stock. But what pleased Government economists was the inventory decline's minor effect on the economy. Although inventory retrenchment has been going on for months, the economy has been able to absorb the loss without any great damage. The question now was how long the inventory decline would continue.

What about the rest of the year? Economists agree that third-quarter gross national product figures will show almost no increase over the second quarter. With all the recent talk of recession, they had begun to fear that expenditures for plant and equipment might fall off later in the year. But this week, to their relief, new figures showed that expenditures are likely to run at a flat $37 billion, only a fraction below what had been earlier expected. Department-store sales also continued strong, running 4% ahead of last year for the last reported week, 2% ahead for the year so far.

Steel Is the Key. What happens for the rest of 1960 depends very much on the steel and auto industries. Just as the 1958 slump was essentially an auto slump, so 1960's sluggard economy has been further braked by the poor performance in steel. Last week steel production was scheduled to decline again, run at 53-8% of capacity. The big hope is that brisk sales of 1961 car models later in the year (see below) will give a boost to the lagging steel industry, thus move the whole economy off center. Since January, reported the First National City Bank of New York, industrial production has shown "a classic pattern of rolling readjustment." Right now, that readjustment shows just enough recessive tendencies to prevent the economy from moving forward strongly but not enough to knock it into a recession. If auto sales live up to hopes, the whole picture could change rapidly.

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