Tracking inventories is the way to judge the economy’s health based on GDP or Gross Domestic Production, a critical economic indicator. GDP is the monetary value of the real business inventories, which include products and services purchased by the final user during a specific period. Hence, inventories directly impact GDP. As the U.S. economy bounced back strongly from the effects of the Covid19 pandemic, business inventory kept growing through the past year and touched 2.4% in December 2021. However, in January 2022, although the inventory growth was strong at 1.1%, the pace of growth slowed down, as confirmed by the Commerce Department. As a result, it appears that inventory adjustment would not impact the economic growth in the first quarter of 2022. The trend of inventory growth in January was as economists expected, and the year-on-year gain was 11.4%.
Real Business Inventories Maintained the Growth Momentum
Inventories of finished goods held by manufacturers, wholesalers, and retailers constitute real business inventories. Against an estimated increase of 2%, retail inventory rose by 1.9% in January. Earlier, as per reports published in December 2021, the increase in retail inventory was supposed to be 4.79%. Motor vehicle inventories, one of the components of the retail inventory data, increased by 2.4% and met the estimates, although the rise in December was much higher at 6.9%. Although auto inventories are not a component of GDP calculation, they increased by 1.7% against the earlier month’s estimate of 1.8%.
Robust Inventory Rise in Q4
The annualized inventory investment with due seasonal annualized adjustment recorded a rate of $171.2 billion in Q4. It translated into a handsome contribution of 4.9 percentage points to the quarter’s growth pace of 7.0%. Most economists note that despite the high growth rate of inventories, it’s still below the pre-pandemic level, and there is scope for rising further.
Growth Estimates for Q1
The slowdown in the pace of inventory growth in January will likely not have any impact on the GDP in the first quarter and would remain neutral. It would be necessary to maintain the high inventory growth rate of December to impact the GDP. On the contrary, growth rate estimates for the first quarter stood below 1% from the earlier 2% due to Russia’s war in Ukraine. The war shot up crude oil prices resulting in the record price of gasoline in the U.S. Russia’s invasion of Ukraine has spiked the prices of wheat and other commodities and is likely to strain global supply chains further.
Further analysis of real business inventories reveals that stocks with manufacturers increased by 0.7% in January, and wholesale inventories increased by 0.8%.
In January, business sales increased significantly by 3.7% after a decline of 0.5% in December. Based on January’s sales price, businesses need 1.25 months to clear all inventories. It’s a positive indication that the economy is moving in the right direction because, in December, the figure stood at 1.29 months.
As of June, business inventories in the U.S. maintain an upward growth rate, often exceeding the estimates slightly.
