Inventories: Warning Signals

One of the U.S. economy's more reliable indicators of future trouble is the mercurial behavior of business inventories—unsold goods on industrial, wholesale and retail shelves. Before every postwar recession—in 1948, 1953, 1957 and 1960—inventories have soared like Icarus only to plunge as businessmen liquidated their stocks. Right now, some familiar warning signals are flying.

Last week the Commerce Department reported that inventories swelled at the precarious rate of $16.4 billion a year during the final quarter of 1966, thus breaking a record set during the Korean War. The resulting $135 billion...