The Inventory Boom Is About To End And Crush U.S. GDP

[OlympicBrian]

(A must-see graph is part of this article; notice the spike in inventories and the drop in new orders near the right side of the graph.)

SocGen's Albert Edwards: The Inventory Boom Is About To End And Crush U.S. GDP
Gregory White | Nov. 18, 2010, 1:04 PM

The U.S. economy has the potential to slip back into recession even though many of the cyclical drivers are already rock bottom, according to Albert Edwards.

Edwards says that, even though new home construction and consumer durables are already at lows, the U.S. economy has a lot of GDP growth left to lose. This is because the U.S. consumer has yet to come back and, right now, the economy's main driver, inventory rebuilding, is about to come to an end.

From Albert Edwards (emphasis ours):

Now you won't need reminding that it is the change in growth in inventories that counts towards GDP growth. So even if inventories rise another $110bn in Q4, as they did in Q3, the contribution to GDP growth is zero. If inventories rise a still strong $60bn in Q4, for example, inventories will deduct 1.5% from annualised GDP growth. With final sales rising a sickly 0.75% annualised (!!) over the last two quarters, you don't have to be a genius at maths to realise a recession is entirely possible, even without sharp declines in housing or consumer durables.

And here's the sharp decline we're in for:

Read more: http://www.businessinsider.com/albert-edwards-inventory-boom-end-2010-11#ixzz15h1GDrkM

[OlympicBrian]

1. If anyone can comment on the graph...

Feel free to comment on the graph since it is slightly lagging.

[Kalyke]

2. That's what you get from layoffs, unemployment and no in-country

manufacturing.

Build up inventory no one can afford to buy? Why?

[tabatha]

3. Because it means jobs for some people.

[OlympicBrian]

4. That's my interpretation too

Massive buildup of inventory illustrated, for sure. But I disagree, we have a lot of US manufacturing, just some of the existing and all the growth is being channeled offshore. We are actually the top manufacturer in the world, though China is about to overtake us.

I also looked at the most recent ISM report--not plotted on the graph I don't think--and orders were higher. I think there is an assumed 6-month lag in play with the orders as plotted.

Still, inventories per that graph do look high going back over two decades; measures of US demand (employment etc.) haven't been on a tear to match the build in inventories.

[madrchsod]

5. inventories of american made goods...

or inventories of foreign made goods?

[OlympicBrian]

6. It's goods made here (nt)

[robcon]

7. Huh? Inventory is an investment for companies. Growth is good news.

It's when inventories shrink that layoffs occur most often.

I think the good news from, for example, Home Depot and Lowe's bodes well.

[OlympicBrian]

8. The point is, where is the demand for the accumulated inventories?

Once inventories are filled and there are slowing new orders, it's time to layoff--that's what the graph appears to show.

That, and the remarkable peak in inventories, over two decades or so, stand out.

Of course, if the US suddenly started to export more, then inventories would be drawn down too. I just checked recent trade data and didn't see that with our major trade partners.

So the author of the story seems to correctly portray the graph...it's just a matter of how up-to-date it is; i.e. has there been a more recent balance between inventories and orders not plotted on the graph? It's hard to see what month(s) he left off on the right.

[OlympicBrian]

9. kick

Any other opinions?

[Art_from_Ark]

10. I would think the opposite is true

If you have inventories that are growing, that means that supply is outpacing demand, which in turns means that not as many workers are needed to meet the demand. When inventories decrease, however, it would signal that demand is catching up with supply, implying that more workers would be needed to handle the growing demand.

[northernlights]

11. If we stockpile it, they will buy?

The inventory buildup is the "growth" we've already seen. Note the past tense.

Now that nobody is buying that inventory, the "growth" will stop in its tracks. Wait for the bargain basement sales in January to pick up whatever you need when another round of store-closings comes.

Or do you think that the inventory buildup in the housing market is also a sign of economic growth? Good for the realtors cause they get so many more listings. Except for the minor detail that there is nobody to show, let alone sell, those listings too.

[Hannah Bell]

12. not a boom -- that was our "growth" for the year -- things people didn't buy.