When a normal "business-cycle" recession is ending, a boost in inventory spending by businesses often signals that things are returning to normal. From Calculated Risk's Q4 GDP: Beware the Blip—
San Francisco Fed President described the impact of inventory changes back in September: The Outlook for Recovery in the U.S. Economy
I expect the biggest source of expansion in the second half of this year to come from a diminished pace of inventory liquidation by manufacturers, wholesalers, and retailers. Such a pattern is typical of business cycles. Inventory investment often is the catalyst for economic recoveries. True, the boost is usually fairly short-lived, but it can be quite important in getting things going. ...But what if this doesn't "get things going"?
Good question. Of course, the reason for asking it is our reasonable expectation that things are going nowhere. Also see Paul Krugman's Blip. Giant Squid forecasters believe the fantasy GDP number may be quite large—
In a research note released last night, Goldman Sachs raised their estimate of Q4 GDP from 4.0% to 5.8%. They cautioned that the "headline will be an eye-popper", but that this growth is mostly due to inventory changes: "More than two-thirds of our estimated increase comes from a sudden stabilization in inventories". They also noted "anything between 4½% and 7% is possible given the volatility of the inventory data".
The rest of the note cautions on 2010, and Goldman still sees sluggish growth of just under 2.0% with the unemployment rate peaking in early 2011.
An inventory spending boost is a "blip" because it is a one-time event during the early stages of recovery. Remember, inventory spending can rise without any concomitant rise in personal consumption expenditures (PCE), which make up 71% of GDP in the United States.
The 4th quarter GDP advance estimate is due January 29th.
Some of you may recall that the advance estimate for 2009:Q3 was 3.5%. This number was met with great fanfare, in so far as Declining Empires must maintain the appearance that all is well. Many fewer of you will recall that this number was revised down to 2.2%, which would be considered very sluggish growth coming out of the biggest downturn since the Great Depression. That is, if anyone remembers that this was the "final" number after all the downward revisions—always down, never up?
Now, we're about to go through this same ludicrous process, doomed to repeat the same mistakes over and over. You sports fans will enjoy the stock market bounce when the 2009:Q4 number hits the airwaves.
Is this the best we can do? I'm afraid it is.
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