Which brings us to the story that led many new economy theorists to be hopeful that recessions would be a thing of the past. In the 1990s, firms began to use computers to improve inventory management in two ways. First, information about demand is now coordinated and transmitted over the Internet. Upticks in the aisles at Home Depot send immediate signals to factories that more production is needed. Second, computers have allowed firms to adjust the type of goods that they produce in order to make sure that hot items are in stock and unpopular items are not.
Computers allow production to turn on a dime.
With these changes, many hoped that the wild inventory swings would be a thing of the past. They are not. Business inventories in the U.S. dropped fairly sharply in February after massive accumulation in previous months. Especially disturbing was the inability of firms to get ahead of the curve. While inventories dropped, the ratio of inventories to sales increased because sales dropped more.