Help Me Out With the "Inventory Bounce" Cynicism
I am as skeptical of GDP numbers as the next guy. But I don’t quite get this commentary by Krugman:
As expected, a big GDP number (pdf), signifying nothing much. It’s an inventory blip: topline growth at 5.7 percent, but only 2.2 of that is final demand.
Don’t get me wrong, I understand the superficial plausibility of distinguishing between changes in final demand versus “mere” changes in inventory. But when we push the analysis one step deeper, I can’t come up with the same conclusion that Krugman reaches. (It’s not just him, by the way, lot’s of people talk like this.)
If I’m not mistaken, the procedure (roughly speaking) goes like this: The BEA measures how much money people spend on finished goods and services. But that figure isn’t necessarily how much businesses produced during the quarter, because some of those sales could have been handled through falling inventories.
So for example, if final sales were $1 trillion, but inventories declined by $100 billion, then they would subtract it and say that GDP was actually only $900 billion. In other words, only $900 billion in stuff was actually produced, since the other $100 billion in sales came from drawing down inventories (which were produced in earlier periods).
OK, so now for today’s announcement of the 4th quarter GDP figures, Krugman is saying that the 5.7% official figure is misleading, because if you strip out inventories, then “final demand” only grew 2.2%. This strikes me as backwards.
If you break down the numbers, inventories still fell in the 4th quarter, they just didn’t fall as sharply as in the 3rd quarter:
Business inventories fell only $33.5 billion in fourth quarter after dropping $139.2 billion in the July-September period. The change in inventories alone added 3.39 percentage points to GDP in the last quarter. This was the biggest percentage contribution since the fourth quarter of 1987.
Am I making sense here? I can understand if inventories rose by a bunch, and then Krugman wanted to say, “Aww, that’s just firms replenishing their depleted inventories–this isn’t really a spike in final demand by consumers.”
Can anybody clarify this? I am hesitant to say not only Krugman, but many other commentators, on this point are getting things backwards, especially since I’m no expert on GDP accounting. I am thinking I’m doing something wrong, because in my version I don’t see where the 2.2% figure is coming from, when you “strip out inventories,” if they only fell by $33.5 billion.
