Warning: Double Dip Risk Rises After Inventory Blowout: Kevin Hassett

“U.S. GDP increased 5.7 percent at the end of last year, with more than half of that growth — 3.4 percent — attributable to changes in inventories. This astonishing impact of inventory has ample historical precedent, and the bottom line has terrible implications for 2010.

Inventories are a remarkable corner of the economy. They are the goods and materials that companies keep on hand to make sure that their operations run smoothly. They are the boxes of food on shelves at the grocery store and the bins of metal parts sitting next to the assembly line in a manufacturing plant.

Inventories were a big part of the story during the worst of this recession, and that is nothing new. In a landmark paper published in 1980, Princeton University economist Alan Blinder found that inventories, while accounting for less than 1 percentage point of national output, accounted for 37 percent of the fluctuations in output.

Since Blinder’s paper came out, inventories have held onto their important role. Updating Blinder’s calculations through the fourth quarter of last year, inventories have accounted for about 34 percent of historical fluctuations in GDP since 1947.

Inventories are even more important during recessions. In another paper, co-authored with Louis Maccini in 1991, Blinder found that 87 percent of the decline in GDP from the peak to the trough of the recession was attributable to inventories.

Hard to Predict

Something that constitutes a small share of GDP can have a big impact on its overall volatility only if it is swinging about wildly. Inventories fluctuate so much for a simple reason: Predicting the future is really hard. ”

http://www.bloomberg.com/apps/news?pid=20601110&sid=a9CpuClIL12E

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