As we had suspected in our latest quarterly conference call, economic growth in the 3Q was feeling worse than it was due to a reduction in inventories. Final sales of domestic product remained pretty strong as it contributed 3% to real GDP. Change in private inventories pulled down real GDP by -1.4%. Inventories dragged down real GDP by the most since in any quarter since 4Q2012.
Overall, change in real private inventories declined from $133 billion SAAR in the 2Q to $56.8 billion in the 3Q. While recessions always have an inventory correction component, an reduction in inventories alone doesn’t mean a recession is imminent. As the chart below shows, it is when the change in private inventories breaks below zero that it becomes likely a recession is upon the US economy.