Inventory Growth Inflates GDP

Inventory growth combined with consumption decline makes for a lackluster fourth quarter.

There was good news and bad in the recently revised growth rate for the third quarter GDP number. The second-round estimate took that figure from 2.8% to 3.6%. The reason this growth isn’t all good is that it comes from a rise in inventories, according to Lindsey M. Piegza, managing director and chief economist for Sterne Agee. This growth happened while consumption continued to wane and business remained sidelined. 

“The surge in inventories accounted for 1.68%, or nearly half of headline growth in the third quarter,” she stated in her most recent report. “Personal consumption on the other hand was revised down from 1.5% to 1.4% in Q3, contributing less than 1% to the headline number and reinforcing the declining trend in consumption since the start of the year.”

Her bottom line assessment is that overzealous last quarter production is likely to severely contract from the current quarter's growth.

“Given the fragile consumer sector and tepid business investment end of the year growth is unlikely to push above 2%,” she concluded. “Also, initial jobless claims fell 23k from 321k to 298k in the week ending November 30th. The four week moving average continues to decline falling from 333k to 322k.

A continued decline in jobless claims over the past several weeks coupled with [the recent] ADP report of 215k has heightened expectation for the November employment report.  Given October’s outsized rise, all eyes—including the Fed—will be looking to see if the improvement in the labor market implied by last month's report will be confirmed or if weakness in November shrugs off October’s rise as an anomaly.”

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