There's One Big Problem With Today's Strong GDP Report

We just learned GDP climbed 4% in Q2, which was much higher than the 3% growth rate expected.

There’s only one problem: Growth in inventories contributed 1.66 percentage points.

Inventory investment is one of the most volatile components of GDP. As the Bureau of Economic analysis notes, unanticipated buildups in inventories can signal future cutbacks in production, while unanticipated shortages in inventories may signal future pickups in production.

“The change in real private inventories added 1.66 percentage points to the second-quarter change in real GDP after subtracting 1.16 percentage points from the first-quarter change,” the BEA said. “Private businesses increased inventories $US93.4 billion in the second quarter, following increases of $US35.2 billion in the first quarter and $US81.8 billion in the fourth quarter of 2013.”

So a surge now may mean Q3 growth will slow.
And as Neil Irwin points out, if you cut out inventories, the economy has grown just 0.7% for the first half of the year.

Or as Bloomberg reports: “…the inventory accumulation, which contributed 1.66 per cent to the 4 per cent gain, indicates that the Bloomberg consensus forecast of 3 per cent for the third quarter may be a bit optimistic.”

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