Might All Future U.S. Recessions Be This Mild?

Pointing out that the current economic downturn has been relatively mild, some economists are suggesting that future U.S. recessions are likely to be mild, too.

The evidence for this assertion lies in the relatively small stacks of steel at the factories of manufacturers like General Motors and the similarly small stacks of merchandise at retailers like Sears, Roebuck and Co. In part because of computerized techniques, such inventories were kept low going into the recession. And that's good.

Keeping inventories low is a lot like staying on the lower rungs of a ladder: It minimizes the danger of getting hurt.

In a typical recession, much of the damage is done as manufacturers close factories, allowing retailers to sell gradually from their bloated inventories. But in the late 1980s, U.S. manufacturers never climbed too high on the inventory ladder. Making extensive use of computers and "just-in-time" techniques, they kept their inventories to the bare minimum.

Leveling the Business Cycle

"We've shaved the peaks and valleys off the business cycle by adopting these techniques," said Richard Berner, chief economist at Salomon Brothers Inc.

In the past, even as the United States neared a recession, factories were often churning out products as if oblivious of the impending hard times. But now, with computer scanners at grocery-store checkout counters and other retail outlets, manufacturers are able to spot sales slowdowns much more quickly.

In fact, some observers have been surprised that business inventories have kept declining so much in recent months, given their already low levels.

Inventories Fall 0.5%

Friday, for example, it was reported that business inventories fell 0.5% in April, more than the 0.4% drop that some analysts had been expecting.

Slumping inventories may be bad news in the current recession, but in the long term the ability of U.S. businesses to survive with limited inventories can only help. As inventory technologies become more widespread, recessions and corresponding recoveries will get milder and milder, Mr. Berner suggested.

Historically, reductions in inventory accumulation have accounted for 65% of the decline in gross national product during recessions. So far in this recession, such reductions account for only 43.7% of the GNP decline, according to Laurence, Meyer & Associates in St. Louis.

Not all of that improvement, of course, can be credited to improved technology in the inventory field. "Technology may give you better control over your inventory, but it doesn't" explain why inventories rise and fall in recessions, said Chris Varvares, a principal at Laurence, Meyer.

Mr. Varvares pointed out that inventories were kept low in the late 1980s in part because many firms were overleveraged before the recession began and could not afford to finance as much inventory.

Furthermore, he said, after the 1987 stock market crash, businesses were watching for this recession long before it happened. As a result, they did not allow inventories to build normally, he said.

Whatever the precise reasons, as the accompanying chart illustrates, the amount of inventory firms hold relative to sales has declined precipitously in the late 1980s. Other things being equal, that trend will help the economy stay on an even keel in the 1990s. [Chart Omitted]

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