Merchandising - Vital signs: slower inventory cuts can help boost growth

http://www.businessweek.com/investor/content/oct2009/pi2009108_704845.htm

Summary:
After analyzing data on "labour market, factory orders, and the Institute for Supply Management's manufacturing survey", economists' forecasts on economic growth for the third-quarter are at a low percentage (under 3%). Companies' inventory reports from August are heavliy relied on to predict the third-quarter GDP where these companies should have had their liquidation reduced by a large amount (in the second-quarter their stockpiles reduced to $160 billion), because "Every reduction of $30 billion in the rate of liquidation adds about one percentage point to GDP growth." Although more records from August are needed for more precision on the forecast, economists "expect the lower rate of inventory cutting to boost GDP by about 2 percentage points." In other words, when inventory is reduced, the GDP is increased, thus improving the economy. For the consumers, they are a main componene for the quarter's growth. In August, sales on cash-for-clunkers (used cars) increased by 2.7%; but the economy in September on consumer spending will go down, slowing down the merchandising business. However, when it comes to consumer price inflation, the Federal Reserve (or Feds) and economists do not share the same point of view. The Feds do not want an unwanted "pickup in inflation" while economists do not want deflation.

Connection:
In Chapter 11, it describes in detail about the merchandising business and how certain variables affect the profitability of a business. In this case, the article relates to this chapter, the inventory in particular. When the inventory is high, the assets are high because this is something that a company owns. However, according to the inventory calculation, when there is less inventory in the ending quarter, profit is increased. Therefore, having more inventory would have a negative impact on the company's profit because less products were sold than produced. Lowering the liquidation rate would give a positive impact to the GDP rate.

Reflection:
In my opinion, the article narrows to two specific examples of how the GDP rate can increase. It is too narrow because the Gross Domestic Product is measured by how the total number of producers and consumers interact with one another and whether the outcome of it will have a high or low or even negative change. The examples of production pertains only to the amount of inventory and cash-for-clunkers, and not the whole market of producers and consumers, which is probably why the GDP increase of the two examples in the article is a small increment.