Can Inventories Continue to Increase?

I notice that there is more concern expressed regarding the size of the Q3 inventory build in relation to consumer sales (see my previous post - The Diminishing Inventory Build).

This recent statement sums things up:

"As the estimable Dean Baker of the Center for Economic and Policy Research observes, the big boost to July-September GDP came from a $115.9 billion rise in inventories, the largest increase in inventories since the $117.2 billion gain in the first quarter of 1998. Alas, as Dean also points out, the improvement in final demand, which has averaged a pallid 1% in the five quarters since the official end of the recession, was a skimpy 0.6% in the latest three months."

Abelson, Alan, 2010. Goodbye, great bond bull market. Barron's, Oct. 30.

The article goes on to state an important comment by Dean Baker, namely "this report suggests a picture of an economy that may be skirting zero growth in the next two quarters." bold added

For a long time, I have noticed that financial analysts seem to pay much more attention to the pace of inventory build as compared to economists. I very much feel that the amount of inventory held by businesses is an extremely important indicator for many reasons.

In theory, improved operational techniques should mean that inventory is an indication of a management's assessment for future sales. Of course this depends on the ability to forecast customer intentions, something that is highly complex and difficult to accomplish with accuracy.

A slowdown or reversal of the aggregate inventory build would have a negative impact on GDP growth. The prospect of GDP growth under performing during the next few months has gained greater acceptance, hence the apparent decision by the Fed to implement another round of quantitative easing.

All of this indicates that job growth will likely continue to be weak. Some believe that October's unemployment situation could become even worse. The following quote from Alan Abelson's article is one view:

"The consensus, he relates [John Williams, Shadow Government Statistics], is for 45,000 additions to payroll and the unemployment rate to remain at 9.6%. His prediction: a contraction in payrolls, a higher jobless rate and rises in the broader unemployment measures. If he's on the money, remember you read it here first. If, by chance, he isn't, be nice and don't remember." bold added

The effects of the 2000 (.com) bubble and ultra low interest rates 2002 - 2005 continue to haunt the American economy. Predictions of a housing market recovery by 2014 and full employment by 2015 appear to be realistic!

Though Republicans will likely make huge gains during the 2010 elections, taking control of the house, I feel the party does not have much of a plan to get America on a path to prosperity. The chances that the Republicans will be able to cut the massive Federal budget deficit appear slim.

I remain unsure that political change in terms of election results will translate into economic prosperity.