Division of labor, specialization, and the Web are beautiful things. In my earlier post on the 4th quarter 2010 GDP numbers I observed that inventories declined significantly and I wasn’t sure why. Well, James Hamilton at Econbrowser did the heavy lifting of investigation so I don’t have to. I only have to quote him:
Consumption spending was strong in the fourth quarter, and could have generated essentially all the real GDP growth by itself. Exports added another 1%. Since imports are subtracted from GDP, the fourth-quarter decline in imports would have provided a further 2.4% boost to the reported GDP growth rate. Nonresidential fixed investment contributed 0.4%, almost entirely from equipment and software. And even housing made a slightly positive contribution.
With all these strong positives, how did we end up with only 3.2% growth? The answer is that a huge estimated decline in inventories subtracted back out 3.7%. The extra spending by consumers and firms was much more than we produced domestically, and the difference represents goods sold out of inventory.
But the fact that a huge negative contribution of inventories coincided with a huge positive contribution of imports does not seem to be a coincidence. There’s a clear pattern in the recent data that when one of these makes a positive contribution to GDP growth, the other makes an offsetting negative contribution. Although we often think of inventories as a substitute for production (you could either produce a good or sell it out of inventories), in the current environment inventories seem to act more as a substitute for imports (you could either import the good, or sell it out of inventories). So although inventories shouldn’t be the same drag on GDP in 2011, I expect imports to go back up and exert a drag of their own.