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The Scary Thing About the Massive Surge in GDP

December 5, 2013
URL: http://www.entrepreneur.com/article/230246

Can economic growth ever be scary?

It can when you look at today’s GDP report.

Economic activity, as measured by third-quarter gross domestic product, rose by a stunning 3.6 percent, a sharp revision higher than the original estimate of 2.8 percent. On the surface, that would suggest the U.S. economy is taking off. Indeed, at 3.6 percent, it is the highest growth rate since the first quarter of 2012.

Great news? Actually, no. It is quite worrisome.

It is how the economy grew that is truly scary. American businesses – yours among them – ended up with $116.5 billion worth of inventories in the third quarter. Economists only expected around $85 billion in inventories. In fact, the increase in inventory would mark the biggest increase since the first quarter of 1998, back when the economy and the markets were ramping up strongly.

That jump in inventories is worth about 1.7 percentage points on the total 3.6 percent rate. When you take out the contributions from this anomalous inventory build, U.S. growth was just 1.9 percent.

Is inventory build always bad? No. In fact, it can be a very good sign, as business leaders of all shapes and sizes anticipate strong consumer demand. One doesn’t accumulate inventory unless one feels he can peddle it on to someone else.

And that’s the problem. Consumer spending was actually revised down in the third quarter, to a rate of 1.4 percent. That is the most sluggish pace since the fourth quarter of 2009.

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Spending, then, will have to rise dramatically to maintain the current rise in GDP. Spending, too, is a much better gauge of where we stand, because the U.S. has a consumer economy. We spend, therefore we are.

What happens if spending doesn’t increase? We have a supply-chain problem on our hands. Let’s think of it in terms of snow globes. ('Tis the season, after all.) If Joe Consumer doesn’t walk in and buy a snow globe, that product stays on the store shelf. If that snow globe collects dust on the shelf, the store owner won’t buy more product from Snow Globes R Us. If orders don’t come in, that inventory accumulation of Snow Globes prevents that warehouse from ordering more globes to be manufactured. All the people whose jobs are tied to putting together the glass, dirty water, white flakes of undetermined origin and the little plastic Mele Kalikimaka signs suddenly find themselves out of work.

That scenario will play out among all products. Forget snow globes (which are probably all made in China anyway). In reality, the inventory build was so massive that we are talking about increases in all categories. Just about everything we buy is waiting for purchase. The stage is set. But the players have yet to arrive. The consumer is still hesitant to part with buck or Bitcoin, with Obamacare looming, geopolitical concerns, elevated unemployment and a general lack of certainty about economic policy.

Full shelves are not yet cause for full panic, but as the dust settles on the snow globes, there is reason to not be so merry this season.

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