One of the weirdly under-discussed features of the current macroeconomic situation is the huge role of inventories in the recovery. I read a lot of economics blogs — there are a lot more I don’t read — and at least sporadically the business press, and I’ve hardly seen this discussed at all. But check it out:
The orange line is the change in GDP, the blue line is the contribution of inventory changes. (Sorry it’s fuzzy. I’m technologically hopeless.) Since the end of the recession, 62 percent of GDP growth has been accounted for by inventories. Inventories have accounted for the majority of GDP growth in four of the five post-recession quarters; in the fifth, they were 48 percent. There’s really no precedent for this. It’s not unusual for inventories to be the main source of growth in one post-recession quarter, but never in the past 50 years have they accounted for half of GDP growth for two quarters in a row, let alone for five. [1]
The question then is, what’s it mean. Honestly? I don’t know.
The natural theory is that it’s supply chain risk and credit risk. When you’re not confident you’re regular suppliers will still be in business a few months from now, you want to keep a stash of whatever inputs you depend on them for on hand. And as transactions move toward a cash-on-the-barrelhead basis, everyone has to hold more goods in stock (along with more cash, but that’s happening too.)
But I suspect there are better answers, if one understood the concrete realities underlying the BEA statistics. Any of you hypothetical readers have ideas?
[1] The first post-war recovery in 1947-48 saw inventories play a similarly large role. I doubt the reasons were the same.
I asked a former professor via twitter to look at this post and weigh in with a possible explanation. I'll leave him nameless as he didn't respond when I said I was going to leave his response a comment here. He said that it had to do with changing accounting standards. Could that be part of the answer?
Good question. (And yes, I am replying to your comment weeks late. But I appreciate comments here, I really do!) In fact, I'm inclined to suspect that there is something going on with the definition of inventories, but have no idea how to start exploring it — a profound disinterest in how the numbers in our regressions are collected is a well-known deformation professionelle of economists. As Peter Kennedy's Guide to Econometrics quotes Josiah Stamp: "The Government are very keen on amassing statistics — they collect them, add them, raise them to the nth power, take the cube root and prepare wonderful diagrams. But what you must never forget is that every one of those figures comes in the first instance from the village watchman, who just puts down what he damn pleases."