Wednesday, April 29, 2009

More Economic Hope

The GDP number was bad, worse than expected, yet we have a sense of optimism today amongst investors. Why? Because the inventories fell. So why does the fact that inventories in the U.S fell mean more than the GDP? After all the GDP is the key indicator of an economy's health. It is because, as we have discussed before, inventories is a leading indicator and GDP is a lagging indicator. No one cares about what happened in the past, we care about what is going to happen in the future. A drop in GDP means the economy did not produce much last quarter. However a drop in inventories means the economy will need to produce more in the future. Inventories are how much goods U.S firms have. If they have a lot of goods, that means they will wait to sell those goods before they start asking manufacturers to make them more goods. So if inventories are high, manufacturers will have to wait a year before other firms start putting in orders for more goods. If the inventories are low, then  firms need to order more goods from manufactures so they can sell them because the firms cannot make money if they do not have anything to sell.  That means manufactures will start seeing orders put in right away, not a year from now, helping the U.S start economic recovery quicker.

Thus, low inventories mean that in the future, firms are going to have to put in orders with manufactures to make them more goods. Low inventory levels is good because it is going to increase the manufacturing production in the future, when firms start asking for more goods. 

So while GDP showed that in the previous quarter, the economy did not produce a lot, the low inventories mean that the economy is going to have to produce more in the future. And that is what we care about, the future, not the past. Add the good news in inventories with the increase in consumer spending, and we are beginning to see more hopes of economic recovery.


  1. inventories went down during the Great Depression as well. did they come up again ? like the Great Depression 1.0 this one is not simply an inventory cycle it's a credit cycle. see you at the bottom.

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