Tuesday, 22 of January of 2019

Economics. Explained.  

Final Sales

December 21, 2017

When the economy is slowing down, firms will accumulate unwanted inventories.   Those inventories still show up in GDP, but they are unsold.  Hence, GDP will be biased upwards.  Similarly, in good times businesses will reduce inventory levels to satisfy demand.  In this case, GDP growth will be understated.

To get a sense of the underlying pace of sales, economists will look at final sales which is GDP less the change  in business inventories.  Final sales slowed to 1.0% in the third quarter after having surged 5.4% in the second quarter.   Over the past year final sales have risen 2.9%.  In the third quarter inventories  climbed $89.8 billion after having actually declined  $36.8 billion in the second quarter.  Thus, inventories  added 2.4% to GDP growth in the third quarter.  Inventories are expected to rise by roughly $75 billion per quarter in the quarters ahead.

We believe that GDP growth will quicken from 2.5% in 2017 to 3.1% this year and 2.8% in 2019.  Consumers are confident.  The stock market should rebound and thereby boost net worth.  Home prices are rising.  Job growth is increasing.  The unemployment rate continues to decline slowly.  Inventories remain lean.  Corporations are making steady profits.   Interest rates are rising slowly but will remain low for some time to come.  Plus, the economy should continue to receive some stimulus from individual and corporate income tax cuts and from some repatriation of overseas earnings.

Stephen Slifer

NumberNomics

Charleston, SC


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