March 26, 2020

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 3.1% in the fourth quarter compared to 2.1% in the third quarter   This more rapid growth rate for final sales was caused by the sharp drop in inventories in the fourth quarter.  Once they are eliminated the growth rate for final sales is relatively robust.  Over the past year final sales have risen 2.7%.  In the fourth quarter inventories rose $13.1 billion compared to a $69.4 billion run up in the third quarter. Thus, inventories  subtracted 1.0% from GDP growth in the fourth quarter.  Inventories are expected to rise $63.0 billion quarterly in  2020.

But all of this changed beginning in March of this year as the government’s response to the corona virus has stopped the economy dead in its tracks.  For what it is worth, we currently expect Q2 GDP to decline 20.0%, and to fall 1.0% for the year.

Stephen Slifer


Charleston, SC