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Nigel Pain Macroeconomic Policy Division Economics Department

The importance of inventory data for business cycle analysis Working Group on National Accounts, 4-6 November 2009. Nigel Pain Macroeconomic Policy Division Economics Department. Changes in inventories can be an important source of business cycle fluctuations:.

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Nigel Pain Macroeconomic Policy Division Economics Department

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  1. The importance of inventory data for business cycle analysis Working Group on National Accounts,4-6 November 2009 Nigel Pain Macroeconomic Policy Division Economics Department

  2. Changes in inventories can be an important source of business cycle fluctuations: • When final demand is unexpectedly weak, firms are typically left with excessive inventory holdings (which are costly to hold). • Efforts to move inventories to more normal levels lead to cutbacks in new production, adding to downward pressures on the economy. • The extent of such changes has proved very difficult to measure accurately and to anticipate.

  3. Stockbuilding has been an important source of recent economic weakness

  4. Projecting Inventories • For GDP growth, what matters is the contribution made by changes in the rate of change of inventory levels . • The normal forecast assumption is to set these to zero. (Quarterly alignment adjustments can be a problem.) • But, in an upturn, a period of positive contributions is likely as economies recover. • Projections require several important judgements: • Are past changes measured accurately? • What indicators are there of ongoing changes? • What are the longer-term trends in inventory levels?

  5. Measuring Inventories • Stockbuilding and stock levels can be estimated using information from business surveys. • Some surveys only ask firms for an assessment of their stocks, rather than measured amount. • Stockbuilding can be used as a residual to balance different estimates of GDP. • Stockbuilding estimates can be adjusted to reduce any residual or puzzling GDP components. • Timely stock level data are hard to obtain.

  6. Inventory data and surveys are sometimes at odds… Survey data from EU survey of manufacturing industry

  7. Timely inventory level data can help inform assessment and projections. • To illustrate, suppose either that: • A zero contribution of private stockbuilding to US GDP growth from 2009Q4 onwards: • Or, a change in stockbuilding in each quarter equal to the change in 2009Q3 (implying a small, positive contribution to growth):

  8. Summary • Inventory data are an important source of business cycle fluctuations. • It is not always clear what is included in the published inventory data and whether it is actual data or just a balancing adjustment. • The data can give a different picture to that provided directly by business surveys. • Quarterly balance sheet information on inventory levels is lacking in most countries. • All these factors complicate policy assessments, and economic projections.

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