While everyone is waiting for the next shoe to drop on our economy (can you say “swine flu”, anyone?), no one is talking too much about the traditional cause of extended recessions — high inventory levels.
Since this was a credit crunch led recession, fears of credit card debt restraining consumer spending are logical. However, Americans and our government have gotten used to living off of debt. It’s unlikely to change in the future as credit eases. We will continue to spend more than we make.
It’s similar to highway deaths. Cars have gotten safer and safer, but traffic fatalities have remained constant. That’s because we start driving faster and more recklessly in “safer” cars. We have a fixed appetite for risk, it seems. It’s the kind of thinking that makes for an economics best seller like “Freakonomics“.
But it’s inventory levels that will determine what happens next. And that’s because things break. Sure, we can delay the purchase of some goods, but as they wear out, they need replacing eventually. So, some purchasing continues. If there is too much inventory laying around in warehouses, then that purchasing doesn’t generate any work or new jobs (besides warehouse forklift drivers, perhaps), it just reduces that inventory level. Once the inventories get low enough, THEN work starts to pick up.
The good news is that inventories are not drastically high in the US. They are at 2001 levels, and the increase in inventory / sales is driven almost entirely by the decline in sales, not the run-up in inventories.
This is of course an aggregate across all industrial sectors. The car industry has inventory levels that are much higher. And we know how that is working out for the manufacturers. Still, as a nation, we cut back on production quickly and deeply enough that inventories didn’t rise. The speed of those initial cuts will dictate a shorter recession than many fear, according to this armchair economist.
Sean Foote's Blog 