From Hero to Zero
|What the Coming Change in Inventory Dynamics Means for GDP
In prior economic expansions going back 35 years, inventories have never been as much of a factor in GDP growth as they have been in this cycle. The most recent quarter offers a prime example: inventories boosted GDP growth by 0.8 percentage points. That influence is about to fade. In this special report, we highlight the changing environment in which inventories have had an uncharacteristically influential role recently in shaping broader economic growth. The combination of the most-tepid growth backdrop in the post-WWII era, the unique changes in the energy sector (both technological and price swings) as well as a continued evolution in inventory management have all played a role in elevating the importance of inventories in this cycle. At this late stage in the expansion, other growth drivers are finally expected to increase at more long-term-normal rates. When you combine that pick-up and broadening in growth drivers with the fading influence of stockpiling due to less-volatile energy dynamics and stabilization in the inventory-to-sales ratio, we anticipate the role of inventories changing from hero to zero.
We looked at economic expansions going back to the early 1980s and measured the contribution to change in GDP growth from inventories. In particular, we looked at the absolute value of the contribution, because we wanted to capture the ups and the downs—the times that inventories boosted growth and the times when they caused a drag. We found that the contribution from inventories in this cycle was not particularly remarkable; the 1.1 percentage point swing factor attributable to inventories did not stand out relative to the 0.8 to 1.5 percentage point range in prior cycles (Figure 1). However, when we looked at the contribution as a share of the overall growth rate, we found that inventories have punched well-above fighting weight in the current expansion (Figure 2). With historically slow GDP growth, the average inventory swing this expansion is equivalent to 45 percent of GDP growth—well above the 27-34 percent share it comprised in past expansions.
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