(Click on image to enlarge)

GDP inventory CIPI data from the BEA, chart by Mish.

The above amusing chart shows the increasing amplitude, in both directions, of Change in Private Inventories (CIPI) over time. Real means inflation-adjusted.

This is the second largest inventory build in history. Only pandemic rebuild was larger.

Real GDP, Real Final Sales, Real GDI

(Click on image to enlarge)

Real GDP grew at -0.2 percent in the first quarter of 2025.

Real Final Sales declined 2.9 percentage points in the first quarter.

That’s the important number, not the upwardly revised -0.2 percent top line number.

The difference between the headline number and Real Final Sales is CIPI which nets to zero over time.

Percentage Point Contributions to GDP

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CIPI added a massive 2.64 percentage points to first-quarter GDP. Subtract that out and the bottom-line GDP estimate is -2.9 percent.

Significant Revisions to First-Quarter GDP

For discussion of the first revisions to first-quarter GDP, please see Significant Revisions to First-Quarter GDP, Income Declines 0.2 Percent

The BEA revised CIPI up by 0.4 percentage points which means Real Final Sales declined by the same amount, from -2.5 percent to -2.9 percent.

Gross Domestic Income (GDI) declined by 0.2 percent.

Key Numbers

• DGP: -0.2 percent
• GDI: -0.2 percent
• Corporate profits: -2.95 percent
• Real Final Sales: -2.90 percent.

These are very recession-looking numbers. Click on the previous link for more revision details.

Q&A on the Inventory Build

Q: Why did this happen?
A: Corporations front-ran Trump’s reciprocal tariffs.

Q: What Happens When Recession Hits?
A: The same thing you might suspect from the preceding chart. Orders will collapse, sales will collapse, and corporations will be forced to mark down inventory for which they overpaid.

Q: Who is to blame?
A: In this case Trump. But historically we can blame Congressional actions and the Fed. You do not get moves like we saw in the great recession without the Fed. And you don’t get panic surges without massive Congressional stimulus.

We now have the second largest inventory surge in history at a time the economy is clearly slowing.

What’s Next?

Great question. I had been pondering inflation as far as the eye can see due to massive tariffs. Inflation plus recession equals stagflation.

However, the US Court of International Trade blocked Trump’s huge reciprocal tariffs.

Trump won a stay pending full appeal, but I am extremely confident Trump will lose in an expedited case scheduled for June.

If recession hits sooner rather than later, a collapse in demand could send prices of goods and services lower too.

Inventory liquidation, with discounts impacting corporate profits may begin. And corporate profits already took a big hit in 2025 Q1.

Another factor is the Fed is highly likely to be slow to cut rates, unless there is a surge in unemployment.

Unfortunately, month-over-month rents appears stubborn. If rents remain high, it will be much more difficult for the CPI to drop and for the Fed to cut.

My best guess now is the worst of the tariff mess is behind us. The long bond (30-year treasury) is my guide on this, currently yielding an elevated 4.92 percent.

Student loan delinquencies are another issue. What former students spent on goods and services will now go to debt paydowns. In isolation, this is deflationary.

Finally, if the stock market tanks, that will be another drain on factors supporting consumption.

Related Posts

May 26, 2025: Student Loan Delinquencies Surge, How Will that Impact the Economy?

The delinquency rate jumped from 0.7% in the 4th quarter to 8% in the 1st quarter.

May 28, 2025: The Court Unanimously Strikes Down Trump’s Global Tariffs, Here’s Why

Let’s discuss Trump’s rationale for the tariffs and the court ruling.

May 29, 2025: Corporate Profits Suffer the Largest Drop Since the Fourth Quarter of 2020

Corporate profits fell by $118 billion, a decline of 2.95 percent.

Everything solidly points to recession, but the tariff ruling may put a damper on price hikes and thus stagflation.

For reasons stated, I am temporarily wavering from near-term inflation.

However, serious long-term debt issues remain. Trump’s One Big Beautiful Bill is a permanent fiscal disaster, and quite inflationary.

For comments, please see The One Big, Irresponsible, Deficit-Increasing Bill Passes the House

The cycle low on interest rates is long gone.

More By This Author:

Continued Unemployment Claims Reach The Highest Since Nov 13, 2021
The Savings Rate Increases In April As Income Rose More Than Spending
Corporate Profits Suffer The Largest Drop Since The Fourth Quarter Of 2020