June 25, 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 fell 3.5% in the first quarter.
Following the 5.0% GDP drop in the first quarter, we expect second quarter GDP to plunge by 50%, but then as federal government stimulus checks work their way into the hands of consumers and businesses, we expect GDP growth to rebound by 51% in the third quarter and an additional 7.0% in Q4.