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Inventories Are the Last Refuge of the Fiscal Cliff Scoundrels

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Thursday, 31 January 2013 05:30

The data has not been kind to the economists and reporters who were hyping the line that uncertainties over the fiscal cliff were slowing growth last year. Strong consumption data, capped by a jump in retail sales in December seemed to dispel the idea that consumers were being cautious due to cliff concerns. Durable goods orders, led by a big jump in capital goods orders in November, suggested that businesses were acting as though the outcome of the standoff would not have a big impact on the economy.

Yesterday's release of data on 4th quarter GDP should have been the final death knell for the fiscal cliff economic drag story. There was strong growth in both equipment and software investment by businesses and purchases of durable goods by consumers. Obviously these folks didn't get the memo about being cautious.

But Joel Naroff, an economist with his own consulting firm, was not giving up so easily. On the PBS NewsHour last night he told viewers:

"Well, I think really what happened was that businesses were really cautious, uncertain about whether or not we'd wind up going off the fiscal cliff.

"And they made some very short-term decisions. It's easy just to keep the warehouses essentially empty. If we don't go off the cliff, they can refill them quickly. And so I think what happened during the end of the year was they just ran things very, very close to the vest, and now I think we will see in the first part of this year that they will have to rebuild it, and that will add to growth."

If Naroff is looking for empty warehouses he better look at the data again. Businesses did not "keep the warehouses essentially empty" in the 4th quarter. Businesses increased non-farm inventories at a $43.8 billion annual rate in the fourth quarter, a pretty health rate. This was a drag on growth because they reportedly increased inventories at an extraordinary $88.2 billion annual rate in the third quarter. In other words, businesses went from adding inventories at a very rapid pace to adding them at a more normal pace. They were not letting their warehouses sit empty. Since GDP is measuring the change in the rate of change, a slower rate of accumulation is a drag on growth.

Call that one strike three for the fiscal cliff fearmongers.

 

Addendum:

Morning Edition committed the same sin: intro econ textbooks all around. Is our economists learning?

Comments (4)Add Comment
"The emperor ...
written by David, January 31, 2013 7:29
... has such nice clothes!," says Naroff.


Such incompetency shall go richly rewarded, no doubt.
So a contraction is a sign of...a healthy economy?
written by Anthony, January 31, 2013 8:07
Dean-

I firmly accept your perspective on "fiscal cliff" fearmongering--that the media, and compliant economists, pushed a narrative about an economy teetering in the face of Congress' protracted fiscal debate. But the US economy nonetheless contracted, a fact that you appear to downplay. Is this not the sign of an unstable--and unhealthy--economy? You seem to suggest that it's an entirely predictable consequence of a growing manufacturing sector, which seems contradictory.
...
written by Chris Engel, January 31, 2013 8:39
The 3rd Q figure was revised up to 3.1% from 2.1%.

Seems to be awash, since the forecast was around 1.1% on 4th Q and ended up -0.1%.

The government spending line is going to baffle the right-wing...if gov had only maintained a higher level of spending GDP wouldn't have been at all near negative.

Another quarter goes by with unused labor and capital resources, another quarter we can't ever get back...

Just because there's no political will...

...TO print and spend.
a tale of two stories
written by pjm, January 31, 2013 9:14
So basically fiscal cliff hysteria (to the extent it was not just completely manufactured to improve the negotiating position of deficit hawks) was a continuation of the confidence/uncertainty story (which has been repeatedly trotted out as a dubious explanation for the slow recovery). The real story is that the lack of spending (stimulus) would hurt the economy but not in an abrupt way, i.e., there was no "cliff" in the cliff.

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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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