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Home Publications Blogs Beat the Press If Businesses Reduce Their Inventories in the First Quarter, the Economy Will Shrink

If Businesses Reduce Their Inventories in the First Quarter, the Economy Will Shrink

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Thursday, 30 January 2014 21:16

Firms added inventories at a record $127.2 billion (in 2009 dollars) annual rate in the fourth quarter of 2014. This increase did not draw much attention because it was only $11.5 billion above the third quarter pace, adding 0.44 percentage points to GDP growth in the quarter. The extraordinary pace of inventory growth in the last two quarters means it is likely that inventory growth will slow in future quarters, which will be somewhat of a drag on growth.

However, it is worth noting that we are likely looking at a slower rate of inventory growth in future quarters, not actually a decrease in inventories as has been suggested in several reports. If inventories were to actually decline (which they almost never do outside of recessions) then it would be a huge drag on growth almost certainly pushing GDP in negative territory. Just to take a simple case, if inventories stayed flat in the first quarter, then the rate of inventory accumulation would have fallen by $127.2 billion, in a single quarter. This would translate into roughly a $508.8 billion annual rate of change (the quarterly rate multiplied by four). With GDP at roughly $16 trillion (in 2009 dollars), this would knock roughly 3.2 percentage points off the rate of growth in the quarter.

Since the underlying rate of growth is almost certainly less than 3.0 percent at the moment, the flatlining of inventories would push growth into negative territory. Even a modest fall in inventories would virtually guarantee a substantial drop in GDP in the first quarter.

Comments (3)Add Comment
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written by David M, January 31, 2014 10:01
Good point, thanks for the clarification.
Why do total inventories always grow, though? Is that to keep up with general growth of the population and consumption?
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written by skeptonomist, January 31, 2014 10:23
In terms of percent change the last quarter was not close to a record, though maybe a little above average for an expansion period. Nothing extraordinary about it one way or another and no basis for sweeping predictions about GDP, just another number consistent with a recovery.
correction
written by Gary, February 01, 2014 9:50
"Firms added inventories at a record $127.2 billion (in 2009 dollars) annual rate in the fourth quarter of 2014."

That should be 2013

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About Beat the Press

Dean Baker is co-director of the Center for Economic and Policy Research in Washington, D.C. He is the author of several books, his latest being The End of Loser Liberalism: Making Markets Progressive. Read more about Dean.

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