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Saturday, March 14, 2009

Inventory Correction

by Calculated Risk on 3/14/2009 05:35:00 PM

The recent data suggests there is a significant inventory correction in progress.

Inventory Correction Click on graph for larger image in new window.

This graph is based on the Manufacturing and Trade Inventories and Sales report from the Census Bureau.

This shows the 3 month change (annualized) in manufacturers’ and trade inventories. The inventory correction was slow to start in this recession, but inventories are now declining sharply.

This change in inventories will probably have a significant impact on GDP for the next few quarters. This is common in a recession. The contribution of changes in inventory to GDP have been pretty wild at times - in the early '80s there were a few quarters where the change in inventory subtracted more than 5% from GDP (annualized) in just one quarter! Something like that could happen in Q1 or Q2 too - and this is difficult to predict - and that could contribute to a horrible GDP number in Q1.

This inventory correction is probably also impacting imports and could be part of the reason import traffic has fallen off a cliff (see LA Port Import Traffic Collapses in February)

The good news is a significant inventory correction will help with GDP later in the year. Even with some evidence of stabilization in personal consumption, I expect a horrible GDP number for Q1 due to this inventory correction and also because of the sharp decline in all categories of investment (especially non-residential investment).