Yesterday’s U.S. GDP report for the first quarter of 2009 showed the largest reduction in business inventories ever. Inventories in the first quarter were substantially smaller than in the fourth quarter. I guess I can understand why Wall Street got excited by this, but they got it wrong. Nearly half of the reduction in inventories was at auto dealers and in consumer electronics. To alleviate any possible confusion, I wanted to show you what this looks like.
The first picture shows one of many Circuit City locations that finished liquidating a month ago. The store is now ready for its next tenant. The second picture shows an auto dealer that moved out at the beginning of the year. There was no time for a sale or an announcement — they just took the cars away and boarded up. Many dealers closed around the same time, often because sales were down or they couldn’t get their inventory loans renewed.
Smaller inventories are often an early sign of the end of a recession, and for many kinds of inventories, that interpretation makes good sense. If the shelves in the supermarket are starting to look bare, and there is nothing for shoppers to buy, the supermarket will have to order more products, the factories will produce more, and so on, an increase in economic activity. But Circuit City will not be ordering any more flat-screen televisions. The auto dealers that closed will not be ordering more cars, and the ones that remain open will have to cut back too as sales remain at a low level and manufacturers cut back on models and options. On top of that, General Motors is looking to cut off more than a thousand additional dealers between now and next year, and that number will surely go higher if General Motors goes into bankruptcy. Every sales location has to have its own inventories, so the fewer dealers there are, the smaller the total inventory is.
If you look at the rest of the inventories that go into the GDP report, they are also declining, but not as fast as employment is declining. That is an important comparison to look at, because most inventories are meant to be sold to businesses or consumers, and you need to have people working or earning a paycheck for that to happen. When you see inventories not falling as fast as employment is falling, you know that inventories will have to fall further. There really isn’t any good news to point to in the GDP report.
Instead, the report confirms what we were seeing already: a steady economic retreat. The economic decline has been eerily consistent from one month to the next since September across all the economic measures. Such a steady decline can only happen when businesses are trying to cut back in an orderly way to keep their budgets from blowing up. That might sound relatively benign, but the other way of looking at it is that businesses are cutting back as fast as they think they can without causing the kind of disruptions that would hurt business. This pattern of retreat is likely to continue until businesses are confident that they are profitable again.
GDP is gross domestic product, the most telling measure of the income of a nation as a whole.