Monday, February 01, 2010

Inventory Hangovers

Kevin Hassett on the historical pattern of growth after large inventory adjustments:

"Since 1970, there have been nine quarters, like the last one, when GDP grew by at least 3 percent and inventories accounted for at least half of that growth. The history of those quarters is hardly a favorable sign of what is in store.

Inventory spikes make for blowout quarters. In the nine quarters with such spikes, the average growth rate was 6.6 percent and the average inventory contribution was 4.4 percent, even higher than what was observed for last quarter.

Spikes also produce hangovers. The average growth rate in the quarter after a spike was 0.9 percent, a whopping 5.7 percent lower. In the second quarter following a spike, the average growth rate is just 1.6 percent."

Since inventories was still actually decreasing in Q4 2009 (only at a far slower rate than in Q3 2009), this "hangover effect" will probably not come in Q1 2010. Instead it will come later in the year.