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Declining commodity prices almost invariably reflect unliquidated inventories. In 1938, a typical inventory liquidation year, U. S. businessmen held production below consumption while they worked off some 11% of inventories on hand at the end of 1937's overproduction splurge. Prices for the year dropped nearly 9%, uninterrupted by an abortive revival in demand and production in the second half of the year. In nearly a straight line, the commodity price index fell from its year's high, January 13 (81.0), to its low, December 24 (76.6). Price deflation continued into 1939, consumption thriving on declining prices.
Last month the price index snapped back with the stockmarket (TIME, June 5), recovered to 76.4. But allegedly short-inventoried U. S. businessmen did not behave as they normally do when prices rise. Instead of bargain-hunting on the way up by ordering merchandise for future delivery, when prices would presumably be higher, most of them continued to wait. Within a week the index resumed its 1938 habit of declining to a new low each week.
Meantime two major industries, which between them can almost swing the Federal Reserve Production index, showed signs of serious inventory trouble, present or to come. Cotton textile print goods inventories were down 40% on a rush of business from last month's all-time high of 210,000,000 yards, but the industry began to curtail production 25% in order to speed up liquidation of the unwieldy balance. No better a sign was a 20% increase of production in the steel industry (from 45% to 54% of capacity). In 1938 semi-finished inventories in the hands of steel makers increased 11% on falling sales, and warehouse jobbers accounted for 17% of the steel sold. A good part of their purchases went into their inventories. With steel purchases falling off and only 7% of steel capacity needed to produce the estimated fourth-quarter needs of the auto industry (some 1,300,000 tons), the 20% increase in steel operation meant that the producers, too, were adding to inventory. This augurs ill for end-summer activity when production would otherwise have been able to rise moderately without adding to top-heavy inventories.