Economic Trends
Edited by Peter Coy
Taking Stock of the Stockroom
During the 1990s boom, American companies bragged that new computer systems enabled them to manage their inventories better. They steadily reduced the amount of goods they kept on hand for a given level of sales (chart).
But companies' ability to manage inventories seemed less impressive after they apparently found themselves with too much on the shelves during the mild 2001 recession. They rapidly liquidated goods on hand, culminating in the fourth quarter of 2001, when inventories plunged at an annual rate of $114 billion. That was the biggest drop as a share of goods-sector output in more than 50 years.
However, a new study by two economists at the Federal Reserve Bank of New York concludes that, at least in the first three quarters of 2001, companies did a better job at managing inventories than in previous recessions. James A. Kahn and Margaret M. McConnell argue that companies reacted appropriately to slowing sales and "were shedding inventories from the outset [of the recession] in a calculated effort to avoid a heavy buildup of stocks." In a typical downturn, companies overaccumulate inventories because they don't manage to slash output as rapidly as sales are falling. This time, the ratio of inventory to sales remained close to target, the authors estimate.
The two Fed economists have a different explanation for what happened in the fourth quarter, when inventories really took a dive. They say that after coping with slumping demand, companies were caught off-guard by an abrupt sales surge and were forced to meet the demand by selling goods off their shelves. The authors estimate that nearly half of the fourth-quarter inventory drawdown was unintended.
Some economists have argued that such big inventory changes are a good thing because they buffer company production schedules against rapid swings in sales. They speculate that since the late 1980s, companies have gotten more systematic about deliberately using inventories as a damper against demand fluctuations. But that's not so, according to new, unpublished research by Massachusetts Institute of Technology economist Olivier Blanchard and graduate student Claudio Raddatz. Based on a statistical analysis, they conclude that there has been no permanent increase in the use of inventories to buffer sales fluctuations.
Extra Risk for Tech Investors
Will tougher accounting standards stop company insiders from abusing the trust of investors? Not in high technology, says a new study by three researchers at the Center for Research in Electronic Commerce at the University of Texas at Austin. Investors in tech companies are even more vulnerable to manipulation by corporate insiders than investors in other companies, say researchers Xianjun Geng, Lihui Lin, and Andrew B. Whinston.
Relatively verifiable indicators of corporate worth, such as current profitability, are less useful in valuing tech companies, the Texas researchers say. That's because most tech companies are valued based on the long-term outlook for products and markets that barely exist yet. If insiders get wind of bad news, they can withhold it from investors until they already have dumped their own shares.
A loss of trust in tech will hurt the economy because both good and bad companies will be cut off from funding. It's an example of the "lemon" theory, which says that the market for goods of uncertain value won't function if people fear they will wind up with a lemon.
The researchers say that tech investors need other reforms in addition to those now being proposed. They suggest that tech insiders should be required to notify the public before they sell shares, giving investors plenty of time to decide whether to sell their own shares first.
A Deficit Too High?
Alarm bells are sounding as the U.S. current-account deficit continues to grow. But the fears may be overdone. A new paper by L. Douglas Lee, president of consulting firm Economics from Washington Inc. in Potomac, Md., suggests that the current-account deficit--officially $393 billion in 2001--could be too high by 50% or more.
Lee says U.S. exports are considerably understated. One of the culprits, he argues, is the Internet. Web shopping has increased the number of shipments valued at less than $2,500--the threshold for reporting export values to the U.S. Customs Service. Also, Customs doesn't track products brought across borders by individuals. Lee surmises these so-called personal exports rose in the 1990s, as borders with Canada and Mexico became more open.
Lee also notes that there is an inconsistency in the economic data. In theory, the current-account deficit should match the net flow of foreign money into the country. That, in turn, should theoretically be just enough to make up for the domestic savings shortfall--that is, the amount by which investment in the U.S. exceeds the savings generated within the country.
But government statistics seem to show that the current-account deficit is much bigger than the savings shortfall. In fact, the gap widened to an annual rate of $207 billion in the first quarter (chart). At least a portion of that, says Lee, reflects an overestimate of the trade deficit.
There's another hint that the deficit is overstated. Globally, the current-account surpluses and deficits of all countries should sum to zero. Instead, the global balance is a growing deficit. Lee thinks bad U.S. data is the biggest factor.
|
Copyright 2002, by The McGraw-Hill Companies Inc. All rights reserved.
Printer-Friendly Version
