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While I have no doubt missed some, I find it strange that there has been little or no commentary about the large role that inventories have played during the recovery. That makes some of the top line numbers problematic, because inventory changes are notoriously hard to interpret correctly.

Higher inventories are presumably a good thing if they result from informed optimism regarding near-term sales growth. They are not so good if they result from slower than anticipated sales. Then there’s the question of interpretation when you get a positive GDP boost because inventories fell, but by a smaller amount than the previous quarter.

Much was made of the sharp deceleration of real GDP growth in the second quarter, to 1.7 percent. However, inventories accounted for 0.8 percentage points of that. Real final sales (real GDP minus inventory changes) were up only 0.9 percent. But wait, real final sales were up only 1.1 percent in the first quarter, far below the advertised 3.7 percent increase in real GDP. Real GDP declined from 3.7 percent to 1.7 percent; but real final sales only declined from 1.1 percent to 0.9 percent. More than two-thirds of the real GDP growth in the first quarter can be attributed to inventories.

Here are the numbers for the four measured quarters of the recovery:

Real GDP Real Final Sales
III-Q 2009 1.60% 0.40%
IV-Q 2009 5.00% 2.10%
I-Q 2010 3.70% 1.10%
II-Q 2010 1.70% 0.90%

The good news is that the economy has not weakened that much recently. The bad news is that it’s been weak all along.