Jeremy M. Piger

English

Research Papers in Economics

January 2005 NationalEconomicTrends
Views expressed do not necessarily reflect official positions of the Federal Reserve System.
C
hanges in inventories held by businesses draw
considerable attention from economists because
of the prominent role they play in the business
cycle. Indeed, the shedding of unwanted inventories often
accounts for a large portion of the decline in gross domestic
product (GDP) during economic recessions, despite the
fact that changes in inventories are quite small relative to
overall production.
However, in recent years businesses have improved
inventory management. For example, advances in infor-
mation technology allow sales results to be more rapidly
incorporated into production decisions, which has the
potential to mitigate the amount of inventory accumulation
(and subsequent shedding) that occurs when sales slow.
These improvements in inventory management may moder-
ate the business cycle in at least two ways. First, to the
extent that inventory mismanagement has caused past
recessions, it is possible that improved inventory manage-
ment may have contributed to a decrease in the number of
recession episodes in recent years. Second, if inventories
fluctuate less violently during the recessions that do occur,
the severity of output declines during these recessions will
be lessened.
In this note I investigate this latter possibility by asking
whether inventory investment has contributed less to the
slowdowns in production observed in the two most recent
business cycle episodes, the 1990-91 and 2001 recessions,
as compared with recessions in the 1950s through the
1980s. The table shows historical data on the percentage
change in real GDP from the beginning to the end of
recessions. The table also shows the
respective amounts of this change that
can be attributed to the change in sales
compared with the change in inventory
stocks, with these two contributions
summing to the total change in real GDP.
The table makes clear that inventory
investment played an important role in
pre-1990 recessions. For example, in
these seven recessions, inventory invest-
ment accounted for 1.4 percentage points
of the average 2 percent peak-to-trough decline in real
GDP. That is, if inventory levels had remained constant
during these recessions, the declines in real GDP would
have been much less severe. 
Is there evidence that inventories played a smaller role
in the past two recessions? The answer for the 1990-91
recession is most likely yes. Indeed, although the decline
in final sales in this recession was about the same size as
the average of past recessions, the decline in inventories
was smaller. In other words, the decline in real GDP in
the 1990-91 recession was smaller than would have been
expected given the decline in final sales and historical
experience. For the 2001 recession the decline in inven-
tories was again less severe than the average decline for
pre-1990 recessions and similar to that seen in 1990-91.
Also, the nature of this inventory decline was quite different
from that of past recessions. In particular, a large portion
of the inventory decline occurred in response to an unex-
pected surge in sales in the months immediately following
the September 11 terrorist attacks.1 Thus, unlike past reces-
sions, most of the inventory decline observed in the 2001
recession was not due to businesses attempting to shed an
undesirably high level of inventories. Overall, then, the
evidence is consistent with a smaller role for inventories
in the two most recent recessions. 
—Jeremy M. Piger
1For more details see James A. Kahn and Margaret M. McConnell, “Has
Inventory Volatility Returned? A Look at the Current Cycle,” Federal Reserve
Bank of New York Current Issues in Economics and Finance, May 2002, 8(5).
Inventories and Recessions: The Historical Record
Peak-trough  Change in GDP  Change in GDP 
change  due to inventory  due to 
Recession episodes in real GDP investment final sales
1952-53 through 1981-82 –2.0% –1.4% –0.6%
1990-91 –1.3% –0.8% –0.5%
2001 0.3% –0.7% 1.1%
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Is the Business Cycle Still an Inventory Cycle?

Is the business cycle still an inventory cycle?

http://research.stlouisfed.org/publications/net/20050101/cover.pdf

Is the business cycle still an inventory cycle?

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