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Wednesday, April 14, 2010

Inventories Growing to Meet Final Demand

Reuters details:

U.S. business inventories rose slightly more than expected in February to their highest level in seven months as businesses restocked to meet strengthening domestic demand, a government report showed on Wednesday.

Department said inventories increased 0.5 percent, the largest increase since July 2008, to $1.33 trillion - the highest since July. January inventories were revised up 0.2 percent, after being previously reported as being flat. Economists polled by Reuters had expected a 0.4 percent rise in February inventories.

Inventories are a key component of gross domestic product changes over the business cycle and a sharp slowdown in the pace of inventory depletion is driving the economy's recovery that started in the second half of 2009.
The below chart shows business sales and production. Production accounts for the change in inventories by taking the sales and adding/subtracting the change in inventories over a given period (3 months in the chart below) to show growth in the amount actually produced to meet final sales.

It is interesting to note that while inventory levels jumped to an eight month high, the impact of inventory rebuild (or lack of depletion) on final GDP peaked in November at a 9.2% three month change and is now down to 2.0% (still quite strong) through the period ending February. As a result, impact of inventory on GDP will be MUCH smaller in Q1 than Q4 (for a full explantion go here).

Source: Census