Today’s GDP figure is being trashed for the fact that 1.44% of the 2% growth figure came from an inventory effect whereby rising inventories boosted the number. The argument against inventory boosts is that ultimately we have to see if the rising inventory is consumed by companies’ customers.
Yes, that’s true, but it’s important to remember that rising inventories aren’t always a bad thing. If companies increase inventories because they are growing more confident about the economy and seeing demand growth, then rising inventories are a natural reaction on their part and part of a growing economy. Certainly you wouldn’t want to see companies slashing inventories because they see bad news ahead.
And if we jump back a few days, the October survey from the National Association for Business Economics (NABE) shows a business sector experiencing demand growth:
Industry demand grew for a fifth consecutive quarter, with 59% of NABE survey panelists reporting an increase in demand at their firms—the highest percentage in five years. The share reporting demand growth topped the share reporting a decline by a wide margin in each of the four major industry sectors identified in the survey.
So maybe this is why companies are comfortable to build inventories.
Moreover, what’s funniest about the inventory effect bashers is that they are rarely mentioning inventory when reduced inventories are dragging down GDP growth – You rarely hear them say, ‘Oh but if you add back the inventory effect then GDP would have been higher.’ No, they usually point to how companies cutting inventory is a sign of bad things to come. Then when inventory grows they say how it doesn’t count.
Yes, inventory growth can prove mistaken, but it’s not always bad, and is frequently a good sign. Would you really want to hear that companies are slashing inventory levels right now? Given what NABE is reporting, we bet the inventory build is actually a sign of companies seeing demand growth ahead, and is thus being underestimated by the sceptics.
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