Inventories Still the Growth Story in Q4

The Bureau of Economic Analysis has released its third look at the economy in the fourth quarter of 2009. The economy grew rapidly in the quarter, but slightly less than previously reported: the new estimate is a 5.6% pace of real GDP growth vs. 5.9% in the prior 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 slowing the rate at which they were working down inventories; the change in inventory investment accounted for 3.8 percentage points of the overall 5.9% of growth. (Updated: 3/31/10)

Consumer spending grew at a modest 1.6% pace and thus added 1.2 percentage points to overall growth (consumer spending accounts for about 70% of the economy and 70% x 1.6% = 1.2%, allowing for some rounding). 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 19% pace. That added 1.1 percentage points to growth, more than half of which was offset by the ongoing decline in non-residential construction.

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 “Inventories Still the Growth Story in Q4”

  1. Hi Donald,
    This is the third time I’ve seen the Q4 inventories story on your blog, so I think it’s worth pointing out that your story seems to be about gross flows into inventory, when BEA reports the net flow in and out of inventory (which continue to decrease, but at a declining rate).

    Your take, which is probably right, is consistent with a world in which business withdraw, say, $200 billion from inventory every quarter, and restocked $40 billion in Q2, $61 billion in Q3, and $180 billion in Q4. However, the numbers are also consistent with an unchanging restocking of, say, $20 billion each quarter, and gradually decreasing removals from inventory.

    Without the gross flows into and out of inventories, I can’t completely discount the second alternative. Are there supplemental BEA data, or are you judging from investment data?
    Best,
    Bill

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