If Businesses Reduce Their Inventories in the First Quarter, the Economy Will Shrink

Firms added inventories at a record $127.2 billion (in 2009 dollars) annual rate in the fourth quarter of 2014. This increase did not draw much attention because it was only $11.5 billion above the third quarter pace, adding 0.44 percentage points to GDP growth in the quarter. The extraordinary pace of inventory growth in the last two quarters means it is likely that inventory growth will slow in future quarters, which will be somewhat of a drag on growth.

However, it is worth noting that we...