February 25, 2021
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 3.0% in the fourth quarter compared to a 4.1% GDP growth rate. Thus, inventory accumulation added 1.1% to GDP growth in that quarter.