In the fourth quarter of 2001 U.S. businesses shrunk their inventories by $30 billion. In the first quarter of 2001 U.S. businesses shrunk their inventories by $9 billion. This reduction in the rate at which inventories declined all by itself induced a +3.1 percentage point swing in the rate of real GDP growth between the fourth quarter of 2001 and the first quarter of 2002.

Why? The national income accountants think of it this way: $21 billion more was spent on inventory investment in the first quarter of 2002 than in the fourth quarter of 2001. But this is just one quarter's change in inventories. If the reduced pace of inventory reduction was maintained for a year, over that year it would add up to an extra $84 billion of investment in inventories. So the swing in inventories is a swing of $84 billion in the inventory contribution to the level of GDP measured at an annual rate.

But this swing in the level of GDP measured at an annual rate is just one quarter's swing. If we were to have a similar swing over the next three quarters as well, it would boost the level of GDP by $336 billion--or 3.1%. Thus the swing in inventories boosts the rate of growth of GDP from the fourth quarter of 2001 to the first quarter of 2002 by 3.1%.

So the swing in inventories means that a -0.2% of a year's GDP reduction in inventories that was there in the fourth quarter of 2001 was not there in the first quarter of 2002. That meant that first-quarter GDP was 0.8% higher than fourth-quarter GDP. And this 0.8 percentage point jump in the level of real GDP in one quarter translates into a 3.1 percentage point contribution to the annual GDP growth rate: a *big* swing to come out of a $21 billion shift in spending patterns.

Posted by DeLong at April 26, 2002 03:31 PM | TrackBack

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