» U.S.: Crying Wolf On the Inventory Correction? Decision Economics

U.S.: Crying Wolf On the Inventory Correction?

Posted August 18, 2015 by rvillareal

*         DE has been crying wolf about the coming inventory correction since early 2015.

*         Inventory investment has been exceptionally high in the past five quarters, the highest sustained pace since 2005. The current $110B pace is $75B above the 25-year historical average of $35B.  A return to a more normal pace may cut over 0.5 percentage point from GDP growth over several quarters.

*         Of course, the inventory correction could happen all in one quarter!  A reversion to the mean could cut GDP growth by nearly 2 percentage points, close to the published results of various Nowcast models, including those used at the Fed.

*         Unless companies start complaining strongly after Labor Day about bloated business stock, it is hard to think that a mechanical forecast of 1% GDP would be enough to dissuade the Fed to drop their inclination to hike rates next month.

*         However, if other factors, such a potential meltdown in China and the EM spill over into the U.S. credit markets, the Fed might decide to wait until December to act.

*         Or if the Fed does pull the trigger in September and GDP growth falls to 1%, it would be very hard to follow up with another rate hike in December.

*         Ironically, a 1% GDP print would actually be good news, since inventories would be in fine shape, with underlying demand growth hanging in there at 2.5% to 3%.  The outlook for early 2016 would be brighter but this would be a hard sell to Congress and the general public in December.

 

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