E A GDPNow Chart Worth Watching

A relatively new chart from the Atlanta Fed is worth watching. The contributions of inventory investment to percent change in GDP Now is estimated without delay.

Jeffrey P. Snider has written about the weakness in payroll spending since 2008, and indeed that weakness picked up in 2012. So it is not a surprise that the new chart shows a cutback in inventory investment. If people don't buy, inventory must be curtailed. But seeing GDP in the present would help predict future economic activity. Before, we just had lagging indicators.

From the Atlanta Fed comes an explanation of traditional lagging GDP measurements:

The growth rate of real gross domestic product (GDP) measured by the U.S. Bureau of Economic Analysis (BEA) is a key metric of the pace of economic activity. It is one of the four variables included in the economic projections of Federal Reserve Board members and Bank presidents for every other Federal Open Market Committee (FOMC) meeting. As with many economic statistics, GDP estimates are released with a lag whose timing can be important for policymakers... 

 

 

Inventory investment is a component of GDP. Macro equilibrium is when the supply of goods equals the demand for goods. When a company produces more than it sells, it cuts back on inventory investment. The chart above will have to be observed going forward.

Channel Stuffing is the hiding of inventory produced by American corporations. Zero Hedge pointed out years ago that is a problem for automakers especially. If those tricks can be measured, we could have a  more complete picture.

Notice that inventory investment was not so substantial in 2015. This is in keeping with Snider's research showing that spending was declining after 2012.

It increased in 2016 and 2017, perhaps as the economy picked up. But while it peaked in third quarter of 2018, there has been a massive cutback in 4th quarter, 2018.

It will be interesting to see how this chart plays out with or without additional tariff wars or lack of same. It will also be interesting to see if the 4th quarter, 2018 collapse in inventory investment is a result of companies being satisfied with their stock, or if a collapse in demand is detected. Or conversely, demand could strong in the 4th quarter, meaning that companies may have to bump up investment in 1st quarter of 2019.

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Disclosure: I have no financial interest in any companies or industries mentioned. I am not an investment counselor nor am I an attorney so my views are not to be considered investment ...

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Norman Mogil 2 weeks ago Contributor's comment

This is a very good discussion on the role of inventories in the business cycle. Most recessions can be traced to mismatched inventories to sales. This is certainly happening as the Trump tariffs play havoc with supply chains in basic industries. So you are right to bring this issue tonthe fore.

Gary Anderson 1 week ago Author's comment

Thank you, professor. I certainly hope the inventory investment chart does not get too ugly going forward