Recent Evidence on the Muted Inventory Cycle

Abstract

Inventories play an important role in business cycles. Inventory build-ups add momentum to the economy during expansions, while inventory liquidations sap economic strength during recessions. In addition, because inventory fluctuations are notoriously difficult to predict, they present considerable uncertainty in assessing the economic outlook.> The role of inventories in shaping the current outlook for the U.S. economy is particularly uncertain. In the early 1990s, inventory swings appeared less pronounced than usual, leading some analysts to conclude the business cycle might now be more muted. New inventory control practices, they believed, were permanently diminishing the role of inventories in the business cycle. Yet, recent strong inventory restocking suggests this conclusion might be premature. Inventories may be just as important in the business cycle today as in the past.> Filardo examines recent inventory data to assess whether the role of inventories in the business cycle has changed. He finds little evidence to suggest inventories are playing a reduced role in the business cycle, and therefore rejects the view that a change in inventory behavior has muted the business cycle.

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