April 29, 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 jumped by 9.2% in the first quarter quarter after having risen 2.9% in the fourth quarter. Given GDP growth of 6.4% and growth in final sales of 9.2%, inventory accumulation subtracted 2.8% from GDP growth in that quarter. Basically, the government put money in consumers pockets in the first quarter but manufacturers couldn’t keep pace because of supply constraints and had to draw down inventory levels. As the year progresses those inventory levels will need to be restored which will boost GDP growth in subsequent quarters.