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Question of the Day

Ken Houghton | January 30, 2010 3:53 pm

Is it really Good News that changes in Real Private Inventories were 3.4% of that 5.7% Q-on-Q GDP in Q4? (h/t Alea’s Twitter feed)

Most reasonable assumption: firms overproduced, relative to actual buying, in anticipation of the Xmas season.

Maybe more later.

Tags: GDP, inventories, retail sales Comments (20) | Digg Facebook Twitter |
20 Comments
  • rl love says:
    January 30, 2010 at 8:38 pm

    I trekked about in Guatemala one time pretending to be a Canadian. It wasn’t my idea, I met this Canadian who was also traveling alone and he suggested the idea. His contention was that it would allow me to see my country in a more honest light, and he was right about that. But what he really wanted was someone to pursue European girls with, and he knew that they were not fond of Americans, and he was right about that too. My luck improved shortly thereafter. And we had a time that would have made Hemingway envious; in a place as dangerous as what Guatemala was then, European girls on the ‘gringo trail’ really appreciated the company of a ‘pair’ of strapping Canadians.
         So it occurred to me that I should allow my Canadian alter ego answer your question. But it is a little more complicated than that, I left home at 15 and I traveled for what turned out to be 15 years and somewhere in there I stopped being an American, and I became just a human. But my views illicit some responses that I have come to recognize as territorial, and so maybe by explaining this, my ‘human’ response may make more sense.
         To begin with the US jammed the dollar down the World’s throat. Then the US interfered in the affairs of any nation that stood in the way of ‘national interests’. Then the US allowed corrupt leaders to aid in the theft of resources at the expense of the World’s poor. While all of this was underway the US solicited its diet-related-disease causing culture by creating trade dependencies via ag subsidies. These trade arrangements included low interest loans to the US, from poor countries, in exchange for loans at higher interest rates to the same poor countries that were lending to the US. Then when the whole world was almost as the US wanted it to be, with so many US citizens being so well paid while producing little of value, all so smug and superior, the US banks sold fraudulent securities on the world market. Then US economists began to advocate a devaluing of the dollar, which, would of course come at humanities expense, but little was said about that.
         So, what does this human think about all of that inventory? I think the US is using its only remaining option, it is stalling while using a PR ploy to unleash the paradox of thrift reserves. And we all know what happens when inventory becomes oversupply. The US economy is dangling by a thread over a liquidity trap, and it is surrounded by adverse feedback loops, and humanity would be better off without US influence, so be it, is what humankind must say. And eventually we will all be better off because of it.

  • Jay says:
    January 31, 2010 at 6:27 pm

    KenHo is at it again. “Most reasonable assumption” if you are brainless, maybe. Inventories can be tricky, as the second derivative is what contributes to growth (I sense KenHo is too busy being the third derivative of the displacement function). Real inventories slightly fell in the fourth quarter and are set to level off. If you believe this trend signals overproduction then I would expect you to publish data/graph showing the I/S ratio rising. Here is a reality-based chart that would suggest that manufacturers should stop cutting inverntories. I define the “Most reasonable assumption” with facts not ideology. Hundreds of thousand businesses went from cutting inventories at a pace of over $100 billion SAAR to $0 right as the I/S ratio normalizes and consumption began to grow, I’ll say the most reasonable assumption is the EMH. Chalk another one up for Fama.

    http://www.census.gov/mtis/www/mtis_current.html

  • rl love says:
    January 31, 2010 at 9:01 pm

    Jay,
    What about the 7% drop in holiday sales as compared to 2008? Where do you get ‘as consumption began to grow”? What about the discounts and the lower revenues. What about all of those large construction projects ending with none coming on line. And what about China’s new trade agreement with the ASEAN, are they missing the ‘reasonable assumption’ about the EMH too? Or did they maybe lose faith like so many others?

  • Juan says:
    February 1, 2010 at 1:20 am

    q4 private inventories were up 5x relative to q3, $21 to $105.7 billion which, on a 2007-09 q to q basis looks very much more to have been dominated by involuntary build rather than a theoretic construct [emh] — fama bites the dust una vez mas.

    http://www.bea.gov/newsreleases/national/gdp/2010/pdf/gdp4q09_adv.pdf

  • Jay says:
    February 1, 2010 at 6:41 am

    Love: I’m looking at seasonally adjusted numbers on a quarter on quarter or month on month basis. See Jaun’s link below for this quote on page 2. The only reason durable goods fell in the fourth quarter was because of Obama Messiah’s Cash for Clunkers in teh third quarter.

    “Real personal consumption expenditures increased 2.0 percent in the fourth quarter, compared with an increase of 2.8 percent in the third. Durable goods decreased 0.9 percent, in contrast to an increase of 20.4 percent. Nondurable goods increased 4.3 percent, compared with an increase of 1.5 percent. Services increased 1.7 percent, compared with an increase of 0.8 percent.”

    Monthly data can be found here…. http://www.census.gov/retail/marts/www/retail.html

    December retail sales were above 2008 levels (see how I provide source data to back up my claims). Note the December m/m decline is not statistically significant. http://en.wikipedia.org/wiki/Statistically_significant

  • Jay says:
    February 1, 2010 at 6:56 am

    Juan: You missed the negative signs in there. Inventories fell $21 billion SAAR in Q4 as opposed to $105.7 billion SAAR in the third quarter. The second derivative is therefore a positive $84.7 billion, which is what gets added to GDP. EMH would suggest that if private inventories become bloated they will correct rapidly. Look at my chart with the I/S ratio again. Businesses accurately predicted how much inventory the needed to liquidate in Q3 so that in Q4 they could essentially stop liquidating inventory. Privave consumption will grow from this point forward, albeit at a sluggish pace. But to hold the I/S ratio constant that will mean slight builds in inventories. If Q1 gets a $10 billion SAAR build that will add $31 billion to GDP growth. Then in Q2 if they add another $10 billion SAAR to inventories they will add nothing to GDP growth.

  • rl love says:
    February 1, 2010 at 12:40 pm

    Jay,
          Here is the question that Ken asked:
    “Is it really Good News that changes in Real Private Inventories were 3.4% of that 5.7% Q-on-Q GDP in Q4?”
         So the question, given the context of our circumstances, suggests that the answer should include a prediction regarding jobs. Your answers to this question are long on insults and bias, but short on answers to the question at hand. In one instance you say:

    “EMH would suggest that if private inventories become bloated they will correct rapidly.” This ‘sort of’ applies to the question, but then the only thing you provide that might suggest a conclusion seems to contradict your: ‘correct rapidly’ (or job loss): “Privave consumption will grow from this point forward, albeit at a sluggish pace.” And so it seems, that insofar as answering the question is concerned, it is you that lacks ANY relevant support, because whether inventory levels are balancing as you say, or if levels do become ‘bloated’, that still leaves your not-quite-a-conclusion without any foundation of support. That of course due to fact that inventory on the shelves is one thing, and the selling of that inventory is another thing.
         And as for my lack of support, over the past few weeks I have written extensively here about my positions, so, must I continually support every last thing just in case someone like you, drops in? Someone quick to presume that all conversations begin when they appear. Someone quick with the insults and presumably in need of a little ego boost. And also presumably desperate for confirmation of a theory that fails to apply to a simple question, but does apply so long as the question is ignored.
         But I suppose if by ‘good thing’, one is mostly concerned with one’s ability to impress himself; and to define not a ‘good thing’, but an ‘accounting thing’, then perhaps the insulting of someone who was so obviously just trying to provide some much needed entertainment, to an otherwise dull field of study, a field of study that has so clearly lost its way, with so many so unable to see the forest for the trees, and in part because they lack experiences like the one I described in my original comment, then perhaps we just have a vastly different opinion of what is meant by ‘good thing’. ~ ray

  • Jay says:
    February 1, 2010 at 1:06 pm

    Ray: You are struggling to understand inventory management. I will expound later if you don’t trust me on this, but for the sake of this post lets assume that businesses try to hold a constant inventory to sales ratio. Under the EMH when that ratio gets out of line it should correct. Given the circumstances, businesses recognized that sales are not going to rebound to pre-recession peaks anytime soon so they have to cut inventories (simple elementary school division). But by how much do you cut inventories? If in the third quarter they cut inventories by $200 billion SAAR, they would have had to add $100 billion SAAR or so to get to where we are. I’m invoking the EMH to show that businesses not only cut inventories in a timely fashion, but hit the bullseye for where to stop. The growth rate of sales henceforth has no bearing on the fact that businesses nailed the correct level of inventoires right on the nose.

  • rl love says:
    February 1, 2010 at 2:34 pm

    Jay,
         You would be correct if you were to assume that I have no formal education in economics, I do however have a general idea of what an ‘algorithm’ is, and I have owned and operated a small manufacturing business for 20 years so I most certainly know how ‘inventory’ applies here.
         So, now, you seem to think that changing your premise to be about my ‘struggling’ to understand — that your being rudeness, and the fact that your ‘good thing’ has more to do with vindicating the EMH than it does the question in play, somehow explains the hypocrisy of your initial insults. But this actually explains why you need to insult people from behind the safety of your computer screen in the first place. You lack the courage to admit to your mistakes and have therefore come to rely on your ability to deceive yourself. But I am not the one struggling here. The question was never: “is the EMH the best way to analyze inventories”. Nor should the broad view be discouraged in the midst of so many narrow views. I was just trying to share what I have to share, and your EMH, will never change that one simple fact. ~ ray

  • Juan says:
    February 1, 2010 at 6:26 pm

    table 3

    change in private inventories
    saar

    2009
    q1  -127.4
    q2  -176.2
    q3  -156.5
    q4    -40.0

    in chained 2005 dollars
    saar:

    q1  -113.9
    q2  -160.2
    q3  -139.2
    q4    -33.5

    so which negative sign did i miss or is it only that i entirely disagree with your statement that 
    “Businesses accurately predicted how much inventory the needed to liquidate in Q3 so that in Q4 they could essentially stop liquidating inventory” ?

    such statements completely fail to account for the anarchic nature of multiple private and competing firms but, instead, pretend the macro level to function as if centrally planned, as if they are  some perfectly determined singular rather than what history has demonstrated time after time but neoclassical idealoques cannot admit.

  • Juan says:
    February 1, 2010 at 6:30 pm

    iow most, not all, the build was involuntary, representative of glut.

  • Juan says:
    February 1, 2010 at 6:37 pm

    iow, such sharply reduced rate of drawdown as seen in q4 can be seen as involuntary build, itself one aspect of a crisis of realization, of glut. [but then again i’m using categories which capital has provided for nearly 200 years so make no sense within the most often erroneous conventional commonplace.

  • Juan says:
    February 1, 2010 at 6:44 pm

    once gain and rather than census –

    http://www.bea.gov/newsreleases/national/gdp/2010/pdf/gdp4q09_adv.pdf

  • Jay says:
    February 1, 2010 at 7:02 pm

    Ray: I was critiquing Ken’s response, because it is wrong. I didn’t try to answer “Is it really Good News….”. I leave those questions to the deeply religious (that includes those who worship a deity and those that worship Kurgman, Keynese, Friedman, etc).

  • Jay says:
    February 1, 2010 at 7:06 pm

    Juan: Yes they are competing firms. There is this thing called price that clears the markets. Now in places like Venezuela, where your boy Hugo sets the prices, then yes inventories are cleared and built at the whim of a central planner (I sense what Hugo intends and what really happens are usually polar opposites).

    If Q4 was an involuntary build, then how low are businesses going to volunatrily let the I/S ratio fall to? 1.2? 1.1? 1.0?

  • Juan says:
    February 2, 2010 at 9:01 pm

    thanksthere jay and yes, theory says market should clear through price but actual firms with actual fixed and variable costs and required returns don’t run on theory – there’s more than one side. firm level planning cannot simply be aggregated into a free market argument without ignoring the contradiction brought out in previous comment.

    same time not either involuntary or voluntary but a combination of the two and one which does not appear in bea or commerce data.

  • Juan says:
    February 3, 2010 at 2:20 pm

    ever meet the late bishop juan jose gerardi?

  • Juan says:
    February 3, 2010 at 2:22 pm

    only ask because i was in that ‘neck of woods’ for a few of the war years.

  • Juan says:
    February 3, 2010 at 2:23 pm

    and sure enough german tourists stood out in a positive fashion.

  • rl love says:
    February 3, 2010 at 6:56 pm

    Juan,
       I was in Guatamala in 1985 I think (?), I know it was just after the quake in Mexico City but I am not sure which year that was. And yes, german tourists were all around. I spent a few months between Nicaragua and El Salvador too and at that time those countries were not as popular with the Euro tourists but Nicaragua was far and away the safest place. Nicaragua though was getting ‘scary’ press due to the Contras etc.. I was only in Guatamala for a couple of weeks and the Presidential elections were about to occur and the goons were especially active. Rumors to the effect that ‘noisy’ were not tolerated and weapons were fired in the distance on a regular basis but I never actually saw anything happen, things were clearly tense though. El Salvador wasn’t much different. Nicaragua was however calm and open.

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