Not At All Inventory Corrections Happen In Recessions by Eric Bush, CFA, Gavekal Capital Blog
As we had suspected in our latest quarterly conference call, economic growth in the 3Q was feeling worse than it was due to a reduction in inventories. Final sales of domestic product remained pretty strong as it contributed 3% to real GDP. Change in private inventories pulled down real GDP by -1.4%. Inventories dragged down real GDP by the most since in any quarter since 4Q2012.
Overall, change in real real private inventories declined from $133 billion SAAR in the 2Q to $56.8 billion in the 3Q. While recessions always have an inventory correction component, an reduction in inventories alone doesn’t mean a recession is imminent. As the chart below shows, it is when the change in private inventories breaks below zero that it becomes likely a recession is upon the US economy.