The Key Driver of Q4 Growth? Inventories

The economy grew briskly last quarter. According to the second estimate by the Bureau of Economic Analysis, gross domestic product increased at a 5.9% annual pace in the fourth quarter of 2009, a bit higher than BEA’s first 5.7% estimate.

As usual, I think the best way to understand this report is to see what sectors contributed the most or least to reported growth:

Almost two-thirds of the growth reflects businesses restocking their shelves and warehouses: inventories accounted for 3.8 percentage points of the overall 5.9% of growth.

Consumer spending grew at a modest 1.7% pace and thus added 1.2 percentage points to overall growth (consumer spending accounts for about 70% of the economy and 70% x 1.7% = 1.2%). That’s down from the previous quarter, when cash-for-clunkers boosted car purchases. Housing investment also slowed, again in the wake of earlier efforts–the tax credit for new home buyers–that had boosted growth in the third quarter.

Business investment in equipment and software showed signs of life, growing at a healthy 18% pace. That added 1.1 percentage points to growth, about half of which was offset by the ongoing decline in business investment in structures.

Government spending fell slightly during the quarter. Stimulus efforts boosted non-defense spending by the federal government, but that increase was more than offset by a decline in defense spending and in state and local spending.

4 thoughts on “The Key Driver of Q4 Growth? Inventories”

  1. Hi Donald-

    With due respect, re: your Blog charts today, my experience in business has been to learn that investing in inventory is one of the greatest forms of taking risk. This should be highlighted, as more, than just stocking their shelves.

    They have the choice of keeping their financial resources in the bank or not extending credit to risk in anticipation of predicted sales or dumping goods, at a possible loss.

    This is a very good sign, actually.

    Did you think this was already understood?

    Because unless you’ve been in such a firm, one might not view the data you presented, in that light.

    My very best,


    1. Professor Marron,

      Could you explain what it means to have exports contributing more to growth than imports detracted? Didn’t the trade imbalance expand from 09Q3 to 09Q4? Is it because the dollar was decreasing at the time? Should we expect that to turn around now that the dollar has grown stronger?



      1. Hi Trevor — That’s a good question. It turns out that the nominal trade balance (i.e., in current dollars) did expand in Q4, as you say. But the real trade balance (i.e., in dollars adjusted for inflation in import and export prices) actually narrowed. That’s what shows up in the GDP data.

        Looking ahead, we face the same set of issues: how will changes in the dollar and other factors affect the real value of exports and imports and how will their prices change.

    2. Hi Jonathan –

      I think most analysts view inventories as a weak source of growth, unless they are reinforced by some signs of life in other aspects of demand. As you say, though, they might be a forward-looking indicator in some cases if firms are stocking up in expectation of upcoming demand. In this case, that would be a sunnier spin than I think most observers have on the data. But, to be honest, I am not sure folks have a good handle on the current evolution of the economy.

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