NEWS AND COMMENTARY
February 14, 2001
US Inventories Growth Slows
By Peronet Despeignes, The Financial Times
Inventory Surplus Not The Major Problem ... Weiss comments
WASHINGTON - The value of stockpiles of unsold goods in the US grew at the slowest monthly rate in two years, government figures showed on Wednesday, reflecting efforts by US businesses to rein in production amid the economic slowdown.
The commerce department said the value of inventories at the factory, wholesale and retail level grew only 0.1% to $1221.21 billion in December after rising 0.3% the previous month.
The increase was in line with the rise in sales at all levels, leaving the inventory-to-sales ratio steady at 1.36.
The ratio has risen at the sharpest rate since the 1994-95 period, the Federal Reserve's first credit-tightening cycle in the 10-year expansion. The rise reflects an increasingly excessive growth in inventories that has forced production cutbacks and layoffs.
In testimony to the Senate Banking Committee on Tuesday, Fed chairman Alan Greenspan expressed confidence that the production "glut," would be quickly worked off, clearing the way for a resumption of economic growth later this year.
"A round of inventory rebalancing appears to be in progress," he said.
He added that new technologies, such as "just-in-time" manufacturing, had accelerated the economy's response to short-term shocks and imbalances. Continued confidence about the economy's long-term prospects would, "with time, bolster both consumption and investment demand" and reduce excess inventories.
A surprisingly sharp jump in sales at the retail level in January reported on Tuesday suggested continued inventory reductions.
Last year, the watchword was "productivity growth." Now, "inventory rebalancing" has become the buzzword in economic circles. Alan Greenspan, in his remarks to Congress yesterday, said that the problems the economy is facing right now are due partly to excess inventories. Once they disappear, the economy should begin to grow again.
But inventory excesses are only one small component behind the current economic slowdown. Sustained high oil prices, for instance, were the major reason behind Goodyear's dismal earnings announcement today. Plus, consumer confidence is highly correlated with the health of the stock market. So when the market drops as much as it has in the past months, consumers tend to rein in spending, adding to the slowdown in the economy.
And still, there is little evidence that inventory stockpiles will melt away quickly. The numbers released today show that the amount of time it will take to get rid of unsold goods hasn't been reduced at all. In order for shelf-clearing to occur, sales will have to increase dramatically over the next few months. But, with business and consumer confidence falling at record rates, the chances of that happening are slim to none.
The same businesses that are desperate to unload inventory are also contributing to the problem. Businesses have been laying off huge numbers of workers with the intention of halting production and increasing their bottom line. But for every worker that is laid off, consumer confidence takes a severe blow. Consumers aren't concerned with helping businesses pare down their inventories; instead, they're worried that they'll be the next victims of recession.
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