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Today’s economy: Inventory purgatory

Kate Davidson Dec 5, 2013
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Today’s economy: Inventory purgatory

Kate Davidson Dec 5, 2013
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We got a big upward revision in the third quarter’s gross domestic product number today.  

The Bureau of Economic Analysis now says GDP growth was 3.6 percent in the quarter, not 2.8 percent, as previously estimated. But before you go popping champagne and buying boats, there’s a caveat.

We’ve been growing, yes, but maybe not in the right areas. That could come back to bite us next quarter.

The surge in growth came from businesses building up inventory — more than $116 billion of it.

“They were stocking up,” says economist Stephen Buckles of Vanderbilt University. “They thought that spending was growing a bit faster than it actually did. So they increased production and they didn’t sell all their increased production.”

That’s the catch. Increased production is good, but then you gotta sell the stuff.

Randy Kroszner is an economics professor at the University of Chicago’s Booth School of Business. He says to think about those businesses like a family stocking up on frozen dinners.

“And you put a lot of those into your freezer,” he says.

But suddenly your kids aren’t eating as much as you expected. You’re stuck with shelves of Swedish meatballs.

“Next quarter you’re not going to be buying as many, because you can just draw down all those in your freezer, cause you had so many stocked up,” Kroszner says.

Doug Handler is Chief US Economist with IHS Economics. He says GDP will probably look pretty weak in the months ahead, as companies try to sell off those inventories without buying more from producers. But he says just as today’s headline number overstates the strength of the economy, those weak numbers in the near future will probably understate it.

“If you really want to get a gauge of what’s happening, you need to subtract out these inventory changes here,” he says. “You still eat one frozen food dinner per night here, and that’s in fact what’s important.”

So, eat up, America, because there’s a lot of frozen fare to get through.

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