Inventory Accumulation Drives the Current Expansion of the U.S. Economy

This bull run since March, 2009 has entered its 21st month, accompanied by the real U.S. economic recovery even though it is just a jobless one.  In the past few years, the U.S. economy has passed four phases in an economic cycle according to My Inventory Theory.

The first phase was seen before the market topped in 2007 when the consumer sale growth powered the inventory accumulation.  For each 1% of the sale growth, the production associated with GDP could expand at 2% assuming the inventory is maintained at three months sale value, with the 1% difference reflecting the inventory growth facing the sale expansion.  In this period, employers added jobs and the market was bullish.

The second phase ended at the Q3 of 2008 from the top of 2007.  In this period, consumer sale growth was flat, so that there was no growth of inventory and production activities.  Production value is equal to the sale value.  But the inventory adjustment, the 2nd derivative of the inventory value, is recorded as negative from BEA GDP report.  As the consequence, the employers stopped adding jobs.

The third phrase was the great recession from the Q3 of 2008 to the Q3 in 2009 when the crash of the consumer demand resulted in plunge of GDP.  With each 1% sale decrease, 2% production cut is needed with another 1% coming from real inventory reduction.  Inventory adjustment is negative and employers slash jobs.

In the 4th phase from the Q3 of 2008 to the Q3 of 2010, the consumer demand recovered to the level of the Q3 of 2008.  The employers increased production, reflecting higher sale value, but refused to add inventory and  jobs.  The inventory adjustment is positive in this period even though there is no real inventory growth.

The 5th phase started from the past September when the confidence of the employers returns based on their experience on the economic cycles and encouraged by the Bernanke’s printing press.  In this phase, taking advantage of lower inventory, business adds inventory and jobs although the consumer demands actually decrease.  The positive inventory adjustment reflects the inventory growth.

The U.S. economy in Q4 of 2010, powered by the inventory accumulation, has recovered to the level 2% higher than that of Q3 in 2008 and its inventory level is on the course to return to the level of Q3 of 2008.  I do not know when this inventory increase phase will end but it must end somewhere without sale growth.

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4 Responses to Inventory Accumulation Drives the Current Expansion of the U.S. Economy

  1. Tattoo Fonts says:

    I wrote a couple articles about the same subject but you seem to know a bit more about it than I do.

    • Hui Zhong says:

      The key in my inventory analysis is that inventory adjustment is not equal to inventory growth. It is 2nd derivative of inventory or the first derivative of inventory growth. Many economists attribute the inventory growth to the GDP growth before the current quarter. The truth is that there is little inventory growth before Q4 and the inventory actually stayed at the level below normal. The low inventory before Q4 drives the current GDP gowth as business has more room to increase inventory.

  2. Tattoo Fonts says:

    I am not sure where you’re getting your information, but great topic. I needs to spend some time learning much more or understanding more. Thanks for wonderful information I was looking for this info for my mission.

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