November 30, 2022
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, which is GDP excluding the change in business inventories, rose 4.0% in the third quarter after climbing 1.3% in the second quarter. Given a GDP increase of 2.9% and a 4.0% increase in final sales, inventories subtracted 1.1% from GDP growth in the third quarter.