August 29, 2019

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 3.0% in the second quarter after having risen 2.6% in the first quarter.   Over the past year final sales have risen 1.8%.  In the second quarter inventories rose $69.0 billion after having jumped $116.0 billion in the first quarter. Thus, inventories  subtracted 1.0% from GDP growth in the second quarter.  Inventories are expected to rise  roughly $75.0-80.0 billion per quarter in the final two quarters of the year.

We believe that GDP growth will be 2.5% in 2019 after having risen 2.5% last year.  Consumers are confident.  The stock market is close to a record high level.  Home prices are rising very slowly.  Job growth continues to climb by 170 thousand per month.  The unemployment rate is steady at a 50-year low.  Corporations are making steady profits.   Short-term Interest rates are likely to decline further in the second half of this year.  Plus, the economy should continue to receive some stimulus from individual and corporate income tax cuts and from some repatriation of overseas earnings.

Stephen Slifer


Charleston, SC