“GDP is one of the most comprehensive and closely watched economic statistics: It is used by the White House and Congress to prepare the Federal budget, by the Federal Reserve to formulate monetary policy, by Wall Street as an indicator of economic activity, and by the business community to prepare forecasts of economic performance that provide the basis for production, investment, and employment planning”[1]

Based on this celebratory definition you would think that GDP (Gross Domestic Product) is the holy grail of everything economic. Really?

As the “P” suggests, the statistic measures “production”, not sales. If you begin with sales, and want to know what has been produced, you need to account for inventory adjustments. For you could have sold everything out of inventory, while nothing was produced. In that case, GDP would be zero. An example:

Let’s say I am a one-company economy, producing light bulbs. One quarter, I come up with a new energy-saving light bulb. I am pretty optimistic about its prospects, so I produce 1 million light bulbs at $1 each. However, consumers do not really like my new invention, and nothing gets sold. Zero sales, but GDP will come out at 1 million. It doesn’t matter what has been sold, but produced:

Frustrated, I stop production. However, in the following quarter (Q2), a journalist writes a raving review about my light bulb. Demand picks up and I sell every single bulb in store, making $1 million in sales. However, due to inventory adjustment, GDP will read “zero” for that quarter.

Gary Shilling (Editor of “Insight”, a monthly investment publication) calculated that inventory adjustments accounted for 31% to 126% of peak-to-trough decline in real GDP during the last eight recessions. Two out of the eight recessions (1960/61 and 1969/70) were entirely due to inventory reduction, and would otherwise not have happened.

It is a complete mystery to me why the earth’s population is subjugated to this nonsense (people lose their jobs during recessions). That nonsense is about to be squared, as we will learn in another post called “Monetary Policy – The N-Word“.