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Shelves Won't Stay So Bare

Economic Trends


But an inventory upswing has risks

Although shifts in inventory demand usually play a big role in business cycles, their impact has been subdued in recent years. Now, with consumption coming on strong for two quarters in a row, that situation is about to change.

"There is no doubt that inventories will boost growth in 1997," says Edward E. Yardeni of Deutsche Morgan Grenfell Inc. He notes that the overall inventory-to-sales ratio fell to a record low in January, with manufacturing stocks the tightest in memory and with retail inventories, except for early 1994, the leanest they've been in a decade.

Indeed, to many observers, the current picture stirs memories of the first half of 1994. That's when a sharp pickup in inventory investment seemed to ignite an inflationary surge in growth--spurring the Federal Reserve to boost interest rates for four months in a row.

For the moment, the consensus is that history will not repeat itself. Yardeni is looking for only a moderate increase in inventory building. "In 1994," he says, "we were coming out of a weak recovery, there was strong pent-up demand for cars and houses, Europe seemed to be on an upswing, and commodity prices were exploding." In 1997, he notes, pent-up demand has been satisfied, Europe is sluggish, and the strong dollar suggests that inventory needs will be met with rising imports.

Similarly, David Kelly of Primark Decision Economics argues that today's apparent inventory tightness is in part a reflection of the widespread adoption of just-in-time inventory control techniques. And that development plus the general expectation that consumption will soon slow again is leading many forecasters to predict that any inventory buildup will be relatively modest.

Still, one sign of rising inventory demand--an upturn in raw-materials prices--has recently surfaced. And as economist Paul Kasriel of Northern Trust Co. observes, "inventories are a notoriously volatile animal." If they start to act up, it's a safe bet the Fed will snap its whip to bring them back in line.By GENE KORETZReturn to top

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Lojack's impressive numbers

With 1.5 million cars stolen in the U.S. each year, it's hardly news that parking an expensive car on the street can be a gamble. Thanks to an antitheft device, however, the risk has fallen sharply in a number of cities.

The device, called Lojack, was first introduced in Boston in 1986 and is now available in 15 states and 20 major metropolitan areas. Usually sold to new-car purchasers by car dealers for a one-time fee of about $600, the Lojack Corp. system involves a small radio transmitter that is hidden in one of many possible places in a car. When the car is reported stolen, the police activate the transmitter by remote control with equipment provided by the company, allowing police cars or helicopters to track the car's location and movements.

About 95% of stolen vehicles equipped with Lojack are recovered--38% within an hour and 75% within 12 hours. And because of the quick recovery, Lojack-equipped cars sustain average damage of less than $1,000, vs. some $4,000 for the 60% of non-Lojack stolen cars that are eventually recovered, according to estimates by Ian Ayres and Steven D. Levitt in a National Bureau of Economic Research study.

But the biggest surprise, report the two researchers, is that the benefits of Lojack to individual owners are far outweighed by the benefits to society as a whole. By leading police directly to stolen cars, Lojack helps them to shut down "chop shops" that dismantle vehicles for resale of parts. (As a result of Lojack, some 53 chop shops in Los Angeles alone have bitten the dust.) And that creates a strong deterrent effect.

Professional car thieves have no way of knowing whether an individual car is armed with Lojack, but they soon learn of the presence of such cars and react accordingly. Ayres and Levitt estimate that one auto theft is eliminated annually for every three Lojacks installed in central cities.

Although Lojack buyers normally receive a discount on theft insurance, the researchers find that current discounts provide the average purchaser with only a small net benefit on a cost-benefit basis. By contrast, the benefit to society in terms of less overall auto theft runs as much as 15 times that to owners. And that suggests that state regulators could boost the social gains by setting more generous insurance discounts for Lojack-equipped cars--thus inducing more owners to install such devices.By GENE KORETZReturn to top

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