Inventory Demand May Be About To Bolster U.S. Growth

Although auto sales and housing activity may be losing steam, economists Joseph Carson and Joseph Quinlan of Dean Witter Reynolds Inc. see little sign of a slowdown in economic growth. Capital spending and rising exports are taking up the slack, they argue, and "a big economic catalyst, inventory building, is about to come on strong."

Despite its normally critical role in business cycles, inventory demand in the current upswing has been unusually subdued. Real manufacturing inventories have actually been declining since mid-1990, and factory inventory-sales ratios are currently at 30-year lows.

Economists have sought to explain the muted inventory cycle by pointing to the adoption of just-in-time inventory control techniques. But a new econometric study by Chan Huh of the Federal Reserve Bank of San Francisco finds no evidence that just-in-time measures have changed inventories' cyclical role.

According to Carson and Quinlan, many companies that only a year ago saw their thin inventories as a plus are now worrying about price and availability. And the breathing space provided by slack demand overseas is evaporating. Quinlan notes that cargo ships bound for Europe this summer are almost fully booked for the first time in five years.

One clear omen is the May survey of the National Association of Purchasing Management. Purchasing agents reported the fastest pace of inventory growth and the slowest pace of vendor deliveries in five and six years, respectively. And the number reporting paying higher prices for supplies was the greatest since the Persian Gulf war.

Once an inventory-building cycle gets under way, observes Carson, it tends to feed on itself--pushing up prices and the incentive to build stocks even more. "Rising output to meet inventory needs will create new jobs and income," he predicts, "and that will offset the current slowdown in consumption."

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