Inventories Are Key To U.S. Third-Quarter Growth

By John S. McClenahen The first official report on U.S. economic performance in the current calendar quarter of 2001 won't come from the U.S. Commerce Dept.'s Bureau of Economic Analysis (BEA) until Oct. 31. However, it's already clear that the extent of inventory liquidation will be a key determinant of GDP growth. The most recent quarterly economic review of U.S. manufacturing companies from the Manufacturers Alliance/MAPI suggests "there continues to be significant paring of inventories to be accomplished in the third quarter," says Daniel J. Meckstroth, an economist at the Arlington, Va.-based business research group. Inventory drawdown decreases GDP, a fact underscored by the revised second-quarter GDP figures released Aug. 29. Between April and June, inventories are now estimated to have fallen at a $38.4 billion annual rate, which, figures Bruce Steinberg, Merrill Lynch & Co.'s chief economist, cost nominal GDP growth four-tenths of a percentage point. The latest BEA number shows the U.S. economy growing at an annual rate of just 0.2% in the second quarter of this year. "While inventories are probably still being liquidated in the third quarter, the rate of decline is unlikely to be as large as in the second quarter," says Steinberg. "That means that production will have to rise faster than demand, adding to GDP growth in the third quarter and probably thereafter." That could be, but the BEA initially underestimated the second-quarter rate of inventory drawdown by $11.5 billion. The BEA's final figure on the second-quarter GDP, including inventories, will be released on Sept. 28. As for the third quarter of this year, Steinberg now estimates a 2% rate of increase in GDP. If the final figure second quarter for GDP remains positive and both the third and fourth quarters post growth, the U.S. economy will be coming close to 11 consecutive years of expansion.

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