Inventory dynamics and business cycles

Description

"Despite the recent patch of sluggish growth, the U.S. economy has experienced a period of remarkable stability since the mid-1980s. One popular explanation attributes the diminished variability of economic activity to information-technology-led improvements in inventory management. Our results, however, indicate that the changes in inventory dynamics since the mid-1980s played a reinforcing---rather than a leading---role in the volatility reduction. Movements in the volatility of manufacturing output over the past three decades almost entirely reflect changes in the variability of the growth contribution of sales. Although the volatility of total inventory investment has fallen, the decline occurred well before the mid-1980s and was driven by the reduced variability of materials and supplies. Our analysis does show that since the mid-1980s, inventory dynamics have played a role in stabilizing manufacturing production: Inventory 'imbalances' tend to correct more rapidly, and the quicker response of inventories to monetary policy and commodity price shocks buffers production from fluctuations in sales to a greater extent. But more extensive production smoothing and faster dissolution of inventory imbalances appear to be a consequence of changes in the way industry-level sales and aggregate economic activity respond to shocks, rather than a cause of changes in macroeconomic behavior"--Federal Reserve Board web site.

Description

"By historical standards, the U.S. economy has experienced a period of remarkable stability since the mid-1980s. One explanation attributes the diminished variability of economic activity to information-technology-led improvements in inventory management. Our results, however, indicate that the changes in inventory dynamics since the mid-1980s played a reinforcing--rather than a leading--role in the volatility reduction. A decomposition of the reduction in the volatility of manufacturing output shows that it almost entirely reflects a decline in the variance of the growth contribution of shipments. And although the volatility of total inventory investment has fallen, the decline occurred well before the mid-1980s and was driven by the reduced variability of materials and supplies. Our analysis does show that since the mid-1980s, inventory dynamics have played a role in stabilizing manufacturing production: Inventory 'imbalances' are corrected more rapidly, and the quicker response of inventories to aggregate shocks--at all stages of fabrication--buffers production from fluctuations in sales to a greater extent. But more extensive production smoothing and faster dissolution of inventory imbalances appear to be a consequence of changes in the way industry-level sales and aggregate economic activity respond to shocks, rather than a cause of changes in macroeconomic behavior"--Federal Reserve Bank of New York web site.

Subjects

Series Statement

• Staff reports ;
• no. 156
• Staff reports (Federal Reserve Bank of New York : Online) ;

Links

• http://www.ny.frb.org/research/staff_reports/sr156.html
• URL

Other Editions

• Inventory dynamics and business cycles: what has changed?Electronic resourceFederal Reserve Bank of New York2002-01-01
• Inventory dynamics and business cyclesElectronic resourceFederal Reserve Board2003-01-01