Commentary > Bid and Ask
A drag on growth
New business practices may mean that the economy won't grow as fast in second half as some expect.
July 31, 2003: 11:19 AM EDT
By Justin Lahart, CNN/Money Senior Writer

NEW YORK (CNN/Money) - One of the reasons economists have such high growth expectations for the second half of the year is that the first half was so doggone tepid.

Corporate America, they point out, is still running incredibly lean, with companies working hard to make sure they don't make or buy more than they absolutely need. Inventory-to-sales ratios, which measure how long it would take a company to sell off the stock it has on hand, remain quite low.

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Justin Lahart, senior writer at CNN/Money, talks about new business practices and economic growth in the second half.

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That means that when companies come to realize that the economy really is improving, they're going to find that they haven't warehoused enough of the widgets and whatzits they sell, and as a result they're going to up their orders from suppliers and boost production levels.

In the past, such inventory building has helped kickstart growth, lifting the economy out of the mire and shifting the cycle from vicious to virtuous again.

But this time there might not be so much of a boost. The culprit? Technology.

Throughout the 1990s, even as the economy boomed, companies worked hard to manage inventories, knowing that if they did they could respond much more quickly to changes in the business climate. They embraced the just-in-time business practices that had helped fuel Japan's economic miracle (remember that?), and developed new technologies to help them.

When the economy went south it only served to show how important inventory management was. The companies that had kept the closest watch on inventories were able to see the downturn the quickest, and adjust.

As a result, one of the few areas that companies actively invested in during the recession was inventory management. One of the most promising developments is something called "radio frequency identification", or RFID. Put simply, these are wireless tags that a company will put on goods that allow them to know not just what and how much they have inventoried, but exactly where it is.

Credit Suisse First Boston strategist Paddy Jilek has pointed out that RFID could have major implications -- Internet mark II is what he calls it -- and that as a result the long decline in inventory-to-sales ratios may continue for some time.

Already major companies have embraced the technology. Gillette, he points out, ordered 500 million RFID tags last year, and Wal-Mart last month told suppliers that it will require suppliers to use RFID by 2005.

In the long run, this should be a very good thing. Companies will be able to operate far more efficiently, boosting profits. In the short run, however, it may mean that the inventory rebuilding that economists expect to fire up growth in the second half of the year may not be so robust.  Top of page

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