September 16, 2003

Notes: What Could Malpass Be Talking About?

Department of "Huh?":

David Malpass on Inventories & Manufacturing Jobs on NRO Financial: ...Though it is popular to blame China for U.S. job losses, the data shows clearly that the ongoing U.S. inventory reduction -- a vestige of deflation and a sign of risk aversion -- drove the weakness in manufacturing, capacity utilization, and manufacturing jobs.... The drawdown in inventories has been part of the drag on manufacturing production. With demand growing strongly, inventories will rebuild, causing manufacturing production to grow. And this increase in manufacturing production will soon contribute to employment gains. The loss of manufacturing jobs since the February 2001 employment peak accounted for almost all the total job losses, making manufacturing jobs a key variable in near-term job growth.

The concerns currently expressed in the financial markets -- and also at the Fed -- over a jobless recovery and excess capacity seem misplaced and could evaporate quickly as inventory rebuilding kicks in.

What is he talking about? Yes, the U.S. economy cut its stock of inventories by $60 billion in 2001 (and by an additional $7 billion in the first quarter of 2002). But that was more than a year and a half ago. Since then there has been no reduction in economy-wide inventories: inventories today are some $9 billion more than they were at the end of the first quarter of 2002. What is this "ongoing U.S. inventory reduction -- a vestige of deflation and a sign of risk aversion -- [driving] the weakness in manufacturing, capacity utilization, and manufacturing jobs"?

Now you could argue reasonably that U.S. inventories fell below their trend in 2001, that businesses are going to rebuild them to pull them back up to trend when business confidence improves, and that this is going to be the source of demand growth when it happens. But that would seem to be a different argument from blaming an "ongong inventory reduction" that was over a year and a half ago for continued "weakness in manufacturing, capacity utilization, and manufacturing jobs."

What numbers could Malpass possibly be looking at?

Posted by DeLong at September 16, 2003 10:04 PM | TrackBack


Good point. And wasn't one of the benefits claimed for the increase in use of IT and the 'new economy' generally that it would lower the level of inventories: permanently

Posted by: Edward Hugh on September 16, 2003 11:43 PM

Steve Liesman of the WSJ had an interesting discussion last week on some of Malpass's theoretical ruminations in his Macro-Economy column. The article, titled, "Washington Needs to Decide If It Favors Capital or Labor" looks at a (quasi supply side conservative) economistís views on the Bush tax cuts.

Note that Malpass is Bear Sternís global economist, and is often mentioned as a potential economic adviser to President Bush.

Liesman (who happens to be a very nice guy) brings a very critical eye to some of the more boneheaded views out there. In my experience, he always writes very thoughtful columns on complex issues. He's worth reading.

Posted by: Barry Ritholtz on September 17, 2003 04:08 AM

I worry when a statement that "explains it all for you" ignores a big part of what is going on. Just about everybody (who isn't trying to blame China - Malpass has a bit of point there) is noting that factory sector productivity is part of the jobs problem. Inventory reduction, because it deals in things that national accounts accountants understand well, would not mask productivity changes, and would not be mistaken for productivity changes. If you put all the blame for job losses on inventories, you are tacitly claiming that productivity had nothing to do with it. That is odd in itself. For Malpass to ignore the productivity issue in his analysis when it is staring him in the face is even odder.

However, it may be that Malpass has picked the right horse to ride. A big jump in inventories is possible and would have many of the effects he is touting, even possible stemming factory job losses. Declare victory and move on.

Posted by: K Harris on September 17, 2003 05:20 AM

The number he is referring to would probably be the inventory to sales ratio. This ratio is currently at the lowest point since the series started in 1992.

Posted by: Christian Meyersahm on September 17, 2003 07:52 AM

I think the argument that Malpass is making is the same one you make. He just does not state it clearly. Malpass does not say outright that inventory is continually being reduced as we speak, rather, he means that the inventory is reduced relative to 2001 and it has never gone back up to 2001 levels. He sees not rebuilding inventories as a risk aversion/vestige of deflation strategy.

Again, it is the same argument that you call reasonable. Malpass does not communicate it clearly.

Posted by: bakho on September 17, 2003 01:37 PM

I'm with Christian--Malpass is talking about the inventory-to-sales ratio (although he should be clearer). In July, according to Census, the seasonally-adjusted total business inventory-to-sales ratio was 1.37, a record low (see

I figured that's what he was talking about as soon as I read it. At worst a minor infraction of not being explicit enough.


Posted by: Dave on September 17, 2003 01:57 PM
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