Tags: Inventory | Buildup | Economic | Growth

Inventory Buildup Could Bolster Economic Growth

By    |   Wednesday, 23 Nov 2011 08:31 AM

Businesses continue to hold back on investment and that is one of the reasons the economy continues to be plagued by slow growth. Corporations have reacted to new regulations and threat of further government regulation by holding more than $2 trillion in cash on their books.

One of the reasons cash balances have grown is because they are investing less in inventory. The most recent data from the Census Bureau shows that businesses have about 8 percent less inventory than normal.

Increasing inventory levels to the historic average would lead to an increase in production and jobs. Getting to that level quickly would increase the GDP by 0.8 percent.

Last quarter, GDP growth was reported to be 2.0 percent. The historic average level of growth since 1947 has been 3.28 percent. Leaner inventories alone could account for the shortfall and were blamed for most of the revision from the initial estimate of 2.5 percent growth.

Some economists argue that inventory levels should be lower because of structural improvements in the economy. They are likely overstating the changes.

The idea of just-in-time inventory popularized by automakers and retail giants like Wal-Mart didn’t eliminate the need for product stockpiles, they simply shifted the cost of storage to suppliers.

Improved automation makes it possible to manufacture products more efficiently, but demand increases from population growth should offset those savings.

High cash balances are a sign that large corporations are reluctant to invest.

Lower inventories are another sign that small businesses are reluctant to invest in the uncertain economy. With more clarity on labor costs and other regulation, they would be more likely to fill their stock rooms and add to economic growth.

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MichaelCarr
Businesses continue to hold back on investment and that is one of the reasons the economy continues to be plagued by slow growth. Corporations have reacted to new regulations and threat of further government regulation by holding more than $2 trillion in cash on their...
Inventory,Buildup,Economic,Growth
279
2011-31-23
Wednesday, 23 Nov 2011 08:31 AM
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