On several occasions when GDP growth has been based primarily on inventory accumulation, I’ve felt compelled to call attention to the difference between inventory growth and growth in the more fundamental categories of fixed investment, consumption or exports. Inventory increases, which count in the GDP numbers as a form of investment, can be good or bad depending on whether they were planned and anticipated and a product of an accelerating economy or whether they were the unanticipated result of sales falling short of expectations. In the latter case, this quarter’s positive is likely to be offset by next quarter’s, or the quarter after’s, negative.
I hate it that the same thing has happened once again to increase the initial estimate of the third quarter real GDP from an annual rate of increase of 1.8 percent to 3.6 percent. Absent the upward revision in inventories, real final sales (real GDP minus inventories) in third quarter increased at an annual rate of 1.9 percent, down from a 2.1 percent increase in the second quarter. The difference this time is that more talking heads are recognizing and acknowledging inventories as the source of the increase. Many, however, are saying that the increase is more likely than not to be anticipated and therefore not likely to be reversed. Let’s hope so.