|
Many firms are seeing a dramatic decline in sales, especially for durable goods. While this pattern is typical for an economic downturn, the data indicates that this time around, the firms are better able to react. They are cutting their inventories faster that they did in the past.
As the chart shows, firms have reduced inventories faster than the average rate* in past recessions. And they started doing so sooner after the peak of the business cycle. The trend is similar to that of the 2001 recession, but different from all prior recessions. Quite possibly, it is a consequence of the just-in-time economy. Improved supply management allows firms to carry fewer inventories. Because of lower inventories during expansionary times, reducing inventories rapidly during slowdowns becomes easier. Curiously—and also in contrast to all prior recessions—the level of inventories remained essentially constant for a long time: since mid-2006 up to the peak of the business cycle in December 2007. The reason for this is unclear, but the absence of a significant build-up prior to the peak made reduction in inventories easier to achieve. An upcoming AIER publication will take a more details look at the way this recession compares to others of the postwar period. *The average is calculated from the 10 postwar recessions prior to the current one by taking the mean of all comparable months. The curves show the percentage difference (vertical scale) in the series’ values for 18 months before and after the peak of the business cycle. To subscribe to AIER Research Reports, please become a Sustaining Member of AIER. Membership starts at just $39 per year.
|
