November 27, 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 1.9% in the third quarter after having climbed by 3.0% in the second quarter.   Over the past year final sales have risen 2.1%.  In the third quarter inventories rose $79.8 billion after having climbed by $69.4 billion in the first quarter. Thus, inventories  subtracted 0.1% from GDP growth in the third quarter.  Inventories are expected to rise  roughly $75.0 billion per quarter in the quarters ahead

We believe that GDP growth will be 2.4% in both 2019 and 2020 after having risen 2.5% last year.  Consumers are confident.  The stock market is at a record high level.  Home prices are rising very slowly.  Job growth continues to climb by 160 thousand per month.  The unemployment rate is steady at a 50-year low.  Corporations are making steady profits.   Short-term Interest rates have declined 0.75% since June.

Stephen Slifer


Charleston, SC