Wednesday, 22 of November of 2017

Economics. Explained.  

Final Sales

October 27, 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 grew at a 2.3% pace in the third quarter compared to a 2.9% increase in the second quarter.   Over the past year final sales have risen 2.2%.  In the third quarter inventories rose $35.8 billion compared to an increase of $5.5 billion  in the second quarter.  With an increase of that magnitude inventories added 0.7% to GDP growth in the third quarter.  We expect inventories to rise by roughly that same amount in the quarters ahead.

We believe that growth will expand at a moderate pace throughout 2017.  Consumers are confident.  The stock market is close to another record high level.  Job growth is increasing.  The unemployment rate continues to decline slowly. Oil prices remain low.  Inventories remain lean.  Corporations are making steady profits.  They have a ton of cash.  Interest rates are going to remain low for another year.  Plus, the economy should receive some stimulus from expected individual and corporate income taxes and from some repatriation of overseas earnings.

Given all of this the economy should expand at a moderate  pace of  2.6% in 2017 and 2.8% in 2018.

Stephen Slifer


Charleston, SC

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