August 26, 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, rose 7.9% in the second quarter after having umped by 9.1% in the first quarter.  Given GDP growth of 6.6% and growth in final sales of 7.9%, inventory accumulation subtracted 1.3% from GDP growth in that quarter.

Stephen Slifer

NumberNomics

Charleston, SC