Bankstone Associates - Weak US GDP Weighed down by Corporate Inventory Reduction


Posted August 1, 2016 by aramaxglobalmedia

Weaker than expected economic data suggests that US corporations reduced inventory levels as rate hike speculation is revived.

 
As earnings season came to an end and reports of lower than expected US economic growth were released, analysts at Bankstone Associates in Tokyo, Japan pointed toward a reduction in corporate inventory levels as a driver to weak economic data.

“The GDP growth figures fell some way short of expectations and a deeper analysis of the drivers show that GDP in the United States is in danger of stagnating further unless the FED step in with a rate hike. Inventories were reduced for the first time in five years and business investment figures continue to decline. The only saving grace for GDP during this second quarter was the level of consumer spending.”

“Naturally as the business cycle unfolds, consumer spending will likely be the next metric to loose steam, which has been reflected by a forecast adjustment for the next quarter to just under 1%. If this is indeed proves to be the case, then three straight quarters of growth each hovers on or around the 1% mark suggests that the US economy is beginning to stall,” continued the Bankstone Associates analyst.

Though a reduction of corporate inventory, the pressure applied on US GDP growth during the second quarter of 2016 is likely to be relieved somewhat as output figures during the third quarter will receive a boost as stock levels are replenished.

“Inventory reductions are generally not seen in the positive as history shows, and economic sense dictates, that such widespread reductions over a sustained period only serves to increase the danger of economic recession. It is perhaps too early to see how this will play out - certainly the reductions may well prove to be nothing more than a much overdue inventory correction. In which case as the US economy appears to be more resilient than anytime over the past decade, business will begin to restock inventories, essentially increasing output levels over the coming quarters.”

The weak GDP figures have raised suggestions that the Federal Reserve will begin discussions on whether to introduction an interest rate hike, however as the economy has not yet fallen into official recession territory, an imminent hike is unlikely unless labour dynamics have been heavily affected as a result of the inventory reductions.
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Last Updated August 1, 2016