October 28, 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, which is GDP excluding the change in business inventories, fell 0.1% in the third quarter after rising 8.1% in the second quarter,  Given GDP growth of 2.0% and a 0.1% decline in final sales implies that a slower pace of inventory decline added 2.1% to GDP growth in that quarter.

Stephen Slifer


Charleston, SC