Wednesday, 15 of August of 2018

Economics. Explained.  

Final Sales

uly 30, 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 surged 5.1% in the second quarter after having risen rose 1.9% in the first quarter.   Over the past year final sales have risen 3.0%.  In the second quarter nonfarm inventories actually declined  $27.9 billion after having risen $30.3 billion in first quarter.  Thus, inventories  subtracted 1.0% from GDP growth in the second quarter.  Inventories are expected to rise by roughly $20 billion per quarter in the quarters ahead.

We believe that GDP growth will quicken from 2.5% in 2017 to 3.1% this year.  Consumers are confident.  The stock market should continue its rise later this year.  Home prices are rising.  Job growth is increasing.  The unemployment rate continues to decline slowly. Oil prices remain relatively 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 the individual and corporate income tax cuts and from some repatriation of overseas earnings.

Stephen Slifer

NumberNomics

Charleston, SC


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