The Problem for Business When Inventory Is No Problem

In an industrial economy, businesses build up inventories to meet expected demand. If sales disappoint even slightly, those inventories can balloon, leading companies to cut production and lay off workers, depressing overall demand. As economist Lloyd Metzler described this “inventory cycle” in a classic 1941 paper, “An economy in which business men attempt to recoup inventory losses will always undergo cyclical fluctuations.”

The U.S. economy has changed a lot since the 1940s. Goods represent a much smaller share of gross domestic product than they used to, and the services and virtual products that have taken their place generally have no inventories. Just-in-time manufacturing and better technology for tracking sales have also enabled manufacturers and retailers to get by with smaller stocks of goods on hand. In the process, inventory swings have become a much smaller factor in economic fluctuations.