November 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 rose 25.5% in the third quarter after having declined 28.1% in the second quarter.
Given the 33.1% increase in GDP in Q3 but only a 25.5% increase in final sales, inventories added 7.6% to GDP growth in that quarter.