Inventory Change Will Help Economic Outlook

Inventory swings have always been destabilizing, a point I made strongly in (if I may be so bold) a good book about economics and business.  Here's what the change in inventories did to the economy over the past two years:

The blue line shows the actual growth rate of GDP; the red line shows all components of GDP except the change in inventories.  Especially in the first quarter of 2009, the change in inventories made the recession significantly worse (though we were in a recession even without the inventory swing).  This was not just a statistical issue.  Factories cut back production because their customers were lowering inventory levels.

Going forward, businesses will eventually have to restock their shelves.  When that happens, a dollars worth of retail sales will trigger more than a dollar's worth of production, as companies both replace what they just sold plus add a little more to their inventory level.  And the inventory gain is happening right now.

The meek economic forecasts may not be anticipating a bounceback in inventories, which make them too pessimistic.  However, after four quarters of inventory recovery, the end of re-stocking will push down GDP growth for a quarter, so look for a little bit of roller coaster in your economic data.

Business Planning and Inventories: I wrote a few months ago about a company that lost a sale–and a loyal customer–due to lack of inventory. (Blog post about inventories.)  I was recently talking to executives who had a very nice sales boost because they had more inventory than their competitors.  When sales started to recover, they gained market share.  Friends, the business cycle is changing.  The time to slash inventories is past.  Now is the time to ensure that you can serve your customers.