Bloomberg Businessweek USA - 12.08.2019

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ILLUSTRATION BY GEORGE WYLESOL. DATA: U.S. BUREAU OF ECONOMIC ANALYSIS

Bloomberg Businessweek

(USPS 080 900) August 12, 2019 (ISSN 0007-7135) H Issue no. 4625 Published weekly, except one week in February, April, June, July, September, and two weeks in December by Bloomberg L.P. Periodicals

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In an industrial economy, businesses build up inventories

to meet expected demand. If sales disappoint even

slightly, those inventories can balloon, leading companies

to cut production and lay off workers, depressing over-

all demand. As economist Lloyd Metzler described this

“inventory cycle” in a classic 1941 paper, “An economy in

which business men attempt to recoup inventory losses

will always undergo cyclical fluctuations.”

The U.S. economy has changed a lot since the 1940s.

Goods represent a much smaller share of gross domes-

tic product than they used to, and the services and vir-

tual products that have taken their place generally have no

inventories. Just-in-time manufacturing and better technol-

ogy for tracking sales have also enabled manufacturers and

retailers to get by with smaller stocks of goods on hand. In

the process, inventory swings have become a much smaller

factor in economic fluctuations.

This shift got a lot of attention in the early 2000s, when

economists were trying to explain the “Great Moderation”

of the business cycle. The sharpest economic downturn

in seven decades put most such research on hold, but

with the current expansion now the longest on record, it

seems quite relevant again.

As inventory cycles and other ups and downs of an

industrial economy have become less important, it now

seemingly takes a financial-market meltdown—such as

the stock market collapse of 2000-02 and the mortgage

crisis of 2007-08—to send the economy into reverse. In

the meantime, a smoother, steadier economy lulls inves-

tors into the very complacency that leads to crisis. <BW>

�Fox is a business columnist for Bloomberg Opinion

◼ LAST THING

●OUT WITH

THE OLD

The current expansion

breaks the previous

record of 120 months,

a period of growth

that stretched from

the waning years

of George H.W.

Bush’s presidency

to the beginning of

George W.’s.

With Bloomberg Opinion

● KEEP IT GOING

Unless a recession

is declared

retroactively (which

seems unlikely), the

current expansion is

121

months old as of the

end of July.

● SHIFTING PRIORITIES

In 1950 total inventory value equaled more than

5% of U.S. sales. In the second quarter of 2019

it was 2.3%, tied for the lowest ever. Services’

share of GDP, which averaged 44% in the 1940s

and 42% in the 1950s, is now 62%.

● STEADY BUT

SLOW

U.S. economic

growth is smoother

but slower,

averaging 2% a year

since 2000 and

2.7% going back to

1980. From 1929
      to 1980, it averaged
      3.6%. Measures of
      entrepreneurship
      and productivity
      growth are down,
      too. Less volatile
      isn’t necessarily
      better.

By Justin Fox

The Problem When

Inventory Is Not a Problem

Contribution of change in private U.S. inventories

to change in real GDP, in percentage points

Q2 1947 Q2 2019