Business Inventories Should Be Larger This Recession—Not The Usual Advice
Inventories dropped during the Covid-19 recession. DR. BILL CONERLY USING CENSUS BUREAU DATA
Businesses cut inventories again, according to the latest report on manufacturers, wholesalers and retailers. Total sales of merchandise was off even more, which seems to justify carrying less stock on hand. But cutting back may be the wrong business strategy for this downturn.
One of the best pieces of advice to companies as the economy enters recession is to trim inventories—but not this recession. The usual advice reflects the lessons of past recessions, which were characterized by weak demand. This downturn, however, finds demand okay but production shut down. This upside-down recession dictates upside-down advice: maintain good inventories.
In the usual recession, inventories build up because sales are surprisingly low. Inventories cost money, whether they are raw materials, work in progress or finished goods. Cash is king in recessions, so most businesses would be better off with the cash than with inventories. Inventory experts note that three things can happen to inventories, and two of them are bad (shrinkage and obsolescence).
That advice is probably good in some sectors, such as hotel suppliers and aircraft fuel sellers. Other companies, though, should consider maintaining high levels of inventories.
Disclosure: None.