March 28, 2024

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 rose 3.9% in the fourth quarter   Given an increase in GDP of 3.4% and a 3.9% increase in final sales, the increase in inventories subtracted 0.5% from GDP growth in the fourth quarter.

Stephen Slifer


Charleston, SC