December Inventory Build at Odds with Q4 Drag on GDP

Wells Fargo Research Team Wells Fargo

Slower inventory investment in Q4 resulted in a 0.7 percentage point drag on GDP growth, but a larger-than-expected increase in December business inventories suggests the Q4 drag may have been over-stated.

A Clue for the Next Estimate of Q4 GDP

A slower pace of inventory investment in the fourth quarter of 2017 sliced 0.7 percentage points off the headline GDP number for the period. We had forecasted less of a decline in inventories and as a result we had anticipated a smaller drag on GDP.
Today’s report of December business inventories showed a larger-than-expected increase which suggests the next revisionto GDP might show a smaller inventory drag after all.

A Reasonable Case for a Steady Build from Here

A pick-up in the pace of sales over the past year (this morning’s miss on January retail sales not withstanding) has helped bring down the inventory-to-sales ratio on trend.
This downtrend for the inventory-to-sales ratio is also evident when we break it out for the wholesale, retail and the manufacturing sectors. This suggests that businesses are justified in ratcheting up inventories gradually over the next year or so.

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Wells Fargo Research Team

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