The U.S. GDP numbers for the fourth quarter were revised up to an annualized rate of nearly 6 percent, but in reporting this, the news media is barely taking a breath before adding that this rapid growth rate can’t last.
How can they be so sure? If you look inside the numbers, you find that the impressive increase in manufacturing is matched by an increase in inventories. As the news stories gently put it, retailers and wholesalers are “replenishing” inventories.
It makes it sound as if the warehouses were empty. But while that is surely true in a few isolated cases, the story when you look at the aggregates is very different.
Inventory levels at the beginning of the last quarter were already far higher than you could justify for the level of economic activity that was taking place. By the end of the quarter, inventories had risen to bubble levels. You cannot justify inventories this large even if you believe that bubble-level spending will return in 2010. And that is extremely far-fetched notion; other indicators suggest that business spending will barely increase this year, and consumer spending is more likely to decline again than to increase.
So this means that businesses were not “replenishing” inventories so much as adding to already bloated inventories — in a word, hoarding.
The reason we know this can’t last is that hoarding is as expensive in business as it is at home. And businesses are more keenly aware of their expenses. Rent, labor, lighting, supplies, insurance, and the other expenses that go with keeping an inventory are tallied and compared to the business’s plan and objectives. Accountants, these days, look over the numbers asking, “Where can we cut back?” Lenders, analysts, and investors study them too, asking, “Is this company well managed?” All this scrutiny tends to lead a business that is hoarding to suspend its purchases until it restores a degree of equilibrium in its operations.
In this way, the hoarding of the fourth quarter could easily turn into the purchasing freeze of the first quarter, as businesses slow down their buying to try to get inventory levels back into balance. In the worst case, the 6 percent (annualized) increase in the fourth quarter could turn into a 12 percent (annualized) decrease in the first quarter. That is what could happen if businesses abruptly returned inventories to the levels of the beginning of the fourth quarter.
I do not expect that to happen, but there are great many other things weighing on the economy in the current quarter, among them, continuing job losses, especially in local government, a decline in consumer activity, and the effects of unfavorable weather across most of the country, destroying crops in Florida and keeping commuters at home in New Jersey. The negatives are well known, the positives more mysterious, but it is hard to imagine that the hoarding effect will be strong enough to lead to another quarter of GDP growth.
I wrote more on this topic in the Fear of Nothing blog.