The latest US GDP report shows how far inventories have to go to catch up with demand

Restocking the shelves.
Restocking the shelves.
Image: Reuters/Richa Naidu
We may earn a commission from links on this page.

The US economy slowed down considerably in the third quarter, as delta-related disruptions inflicted more damage than expected.

Consumer spending on durable goods like cars tanked in the third quarter, while business spending on equipment and building took a hit, according to the Bureau of Economic Analysis. But there’s one upside to the downshift: It gave companies a chance to plug their rapidly depleting inventories.

“The same demand for goods and services wasn’t there in Q3 because of supply constraints and the rise of Delta cases,” said Nick Bunker, a labor economist at Indeed.

The pandemic decimated inventories as factories closed and covid-19 restrictions spurred big spikes in demand for goods like electronics and building materials for home improvement projects. Companies continued to draw down  inventories in the third quarter, but at a much slower pace: They were down $68 billion vs. a decline of  $174 billion in the second quarter.

That doesn’t mean that Americans can expect shortages and delays to disappear. At current levels, inventories are still not enough to meet demand, but the gap is getting smaller, said George Pearkes, an investment analyst at Bespoke Investment Group.

For instance, car industry inventories declined by $54 billion vs. the $104 billion decline in the previous quarter. And they went up in other sectors, like wholesale trade and department stores.

How soon inventories can meet rising demand depends on how much money consumers have to spend, when supply chain issues work themselves out, and whether or not companies can hire more workers.

A stronger fourth quarter?

Typically, a large upswing in inventories during one quarter would lead to an even bigger increase in gross domestic product (GDP) the next quarter, but supply chain restraints probably mean that the next quarter won’t be a blowout, Pearkes said. “Just because inventory levels are rising doesn’t mean that they’re keeping up with sales,” he said.

Inventory shortfalls could persist for a while, especially if higher wages prompt workers to spend more. Pearkes expects this move in inventories to be the largest one posted during this recovery.

But those wages increases might also lure more people to come back into the workforce, easing a labor crunch that is also crimping supply, Bunker added.