August 30, 2023

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 2.2% in the second quarter after having jumped 4.2% in the first quarter..   Given an increase in GDP of 2.1% and a 2.2% increase in final sales  the increase in inventories had virtually no  impact on GDP growth in the second quarter.  Inventories are certain to climb more rapidly in subsequent quarters of this year.

Stephen Slifer


Charleston, SC