April 30, 2025

When the economy is slowing down, firms will accumulate unwanted inventories.   Those inventories still show up in GDP, but they are unsold.  Hence, GDP will be biased upwards.  Similarly, in good times businesses will reduce inventory levels to satisfy demand.  In this case, GDP growth will be understated.

To get a sense of the underlying pace of sales, economists will look at final sales which is GDP less the change  in business inventories. Final sales, fell 2.5% in the first quarter after having risen 3.3% in the fourth quarter.  The estimate of final sales was distorted by a huge increase in inventories.  Presumably some of the imports that are intended for future use ended up at least temporarily inventories.  Subtracting a big increase in inventories from GDP ended up as a 2.5% decline in final sales.  Given a decline in GDP of 0.3% and a 2.5% decline in final sales, the change in inventories added 2.2% to GDP growth in the first quarter..

Stephen Slifer

NumberNomics

Charleston, SC