August 27, 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 28.5% in the second quarter.

Following the 5.0% GDP drop in the first quarter, GDP dropped 31.7% in the second quarter.  Given the 31.7% drop in GDP in Q2 but only a 28.5% drop in final sales, inventories subtracted 3.2% from GDP growth in that quarter.

Stephen Slifer


Charleston, SC