A Sleeper That Could Rouse The Recovery

If there's one reason for the consensus expectation of a lackluster recovery in the months ahead, it's probably the reduced role of inventories. Many economists argue that the adoption of strict inventory management techniques in the 1980s has eroded the once-powerful impact of inventory shifts in economic fluctuations. Moreover, a recent inventory surge in the face of declining sales suggests that business inventories remain uncomfortably high.

In past business cycles, inventories have accounted for much of the severity of downturns and the vigor of upturns. That's because companies typically indulge in heavy stock-building in the late stages of expansions, then slash output to reduce excessive inventories once a recession begins, and finally galvanize production to rebuild stocks after demand starts to recover.

This time around, however, stock-building was relatively restrained before the recession struck--a development related to the extensive use of "just-in-time" inventory-control systems by manufacturers. And just as this restraint contributed to the relative mildness of the recession, most economists believe it will dampen the recovery.

Economist Giulio Martini of Sanford C. Bernstein & Co. thinks an inventory shift could still pack considerable punch, however, propelling the economy forward at a 4%-to-4.5% clip rather than the sluggish 2%-to-2.5% pace that most forecasters anticipate. For one thing, Martini points out that overall real inventory-sales ratios have been relatively flat in recent years as tighter manufacturing inventories have been offset by less stringent controls in the retail sector. For another, a sharp rise in real inventories last quarter was accompanied by an equally sharp pickup in nonpetroleum imports, which soared at a 17% annual rate in the second half of last year. Since manufacturers have been slashing inventories during this period, Martini concludes that imports accounted for all of the rise in inventories.

Subtracting imports from the inventory numbers, Martini estimates that real stocks of nonoil domestically pro duced goods declined at a 2.9% annual rate last quarter (chart). Thus, he predicts that "rising demand will exert a far stronger than normal impact on domestic production in coming months."

Part 2

One of the most worrisome trends in higher education in recent decades has been an apparent loss of interest by American youth in the sciences and engineering. From 1970 to the mid-1980s, for example, the number of graduating college science majors actually declined at the same time that the college population was exploding.

While many factors contributed to this trend, economists Richard H. Sabot and John Wakeman-Linn of Williams College believe that colleges themselves bear partial responsibility. In a recent issue of The Journal of Economic Perspectives, they point an accusing finger at the grade inflation rampant in liberal arts courses since the early 1960s.

The two economists' analysis of grading standards in nine colleges and uni- versities indicates that in the early 1960s, grades were generally similar and low in most departments. But by the mid-1980s, they found that while such departments as mathematics, chemistry, and economics still maintained tough grading standards, other departments such as art, English, music, philosophy, and political science had become high graders, bestowing A- or higher grades on an average 32% of students. By contrast, low-grading departments, such as math, gave such grades to only 19% of students, while 40% of students got C+ or lower grades.

Not surprisingly, the researchers also found that grades had a significant effect on students' subsequent course choices, enhancing the probability of their taking a second course in a high- grading department and lowering the chances of their studying low-grading subjects. Further, they note that grades in high-grading departments were less accurate predictors of students' subse- quent performances in college than grades in low-grading departments.

These findings lead Sabot and Wakemann-Linn to urge a return to stricter grading standards by all departments. Such a change, they say, would "not only provide more accurate information to students about their relative strengths and weaknesses, but might well encourage them to study more science and mathematics."

Part 3

Anemic auto sales continue to dog Detroit despite a slight uptick in February. But there's a hopeful sign just down the road. Ford Motor Co. reports that orders for heavy trucks--the big rigs that roam the interstates and are built to buyers' specifications--have been running 56% above their year-earlier pace in recent months. That's good news, since heavy-truck orders typically perk up early in an economic recovery.

To be sure, no one's celebrating just yet. While fleet buyers, who account for a third of the market, are hitting the throttle, leasing companies and individuals still are holding back, says Ford. And last year's sales were severely de- pressed by the gulf war and recession.

Still, to meet surging demand, Ford recently canceled two weeks of planned downtime at its truck plant in Louisville, Ky. And smaller trucks are moving fast-er, too. Judging by past cyclical patterns, cars can't be far behind.

With David Woodruff in Detroit

Part 4

Holy ringing cash registers, Batman! Michael Evans of Evans Economics notes that real sales of restaurant meals, airline travel, and recreational services have climbed at a 14% annual rate since October, while motor vehicles, funiture, appliances, and other durables have lost ground. Does the small-ticket surge foreshadow big-ticket outlays? No, says Evans, who argues that "consumers have moved to small-ticket items because they're still too worried about the future to take on larger debts."

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