Today, the chances of a massive inventory build-up are greatly diminished for two key reasons. First, during the last 15 years, corporate managements have systematically changed their approach to inventory management. They have recognized the benefits of using a just in time approach and have reduced inventories as a percent of sales to the lowest levels in 50 years. The exceptions to this rule are in process-driven industries like semiconductors, chemicals and paper, where companies need to keep their plants running. Second, with the growth of the service economy, inventories that are associated with capital goods and consumer products represent a smaller percentage of the economy than ever before.
People represent the key inventory in the service economy.
Rising productivity rates indicate that businesses are doing more with fewer people, but current employment levels are healthy and do not reflect an inventory build-up of workers. This combination of better inventory management and the growth of the service economy has resulted in a more competitive and more diversified economy, and has reduced the frequency and depth of economic downturns. Worries that the stock market has had it too good for too long have more validity. Returns in stocks are driven by the actual earnings performance of the underlying companies and by the valuation level that an investor is willing to pay for those earnings. One reason for this expansion is the dramatic decline in interest and inflation rates over the past twelve years.