February 8, 2023
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Measure of business inventory could dictate future of interest rates


NEW YORK —  An often-overlooked measure of business inventories may hold a powerful clue to the future direction of interest rates, an influential Federal Reserve official said Oct. 9.

Dennis Lockhard, president of the Federal Reserve Bank of Atlanta, told a group of business journalists that his staff’s analysis of third quarter GDP has reported “weakness due to inventory drawdowns.” When combined with the effect of a slowdown in net exports due to China weakness and the stronger dollar, his staff is signaling GDP growth of 2 percentage points below the 3.9 percent reported for the second quarter.

However, he said, “looking through the quarterly swings in GDP” he expects growth to be on the same 2 percent to 3 percent track that is has been on for the past several years. Because inventory drawdowns will likely be offset by inventory building in the future, Lockhard said he was expecting the effect to be transitory.

When manufacturers ship inventory to distributors, the shipments add to GDP; when distributors shed inventory due to sales, the GDP number is correspondingly reduced.

A more stable figure has been final sales, which continue to show a U.S. economy that is expanding, he said.

Lockhart said he expects conditions to be in place for the Fed to begin gradually raising interest rates before the end of the year. “Liftoff at the October or December meeting is likely to be appropriate,” he said.

Lockhard said he saw little danger of Fed action to raise interest rates upending the economy. In response to a question, he said he saw “no recession in the next three years or a bit longer” although he added that sudden, unforseen shocks to the economy are always a risk.

He said that the threat of a government shutdown or fight over raising the national debt ceiling is “not a good thing for  confidence.”

• Editor Henry Dubroff is attending the Society of American Business Editors & Writers fall conference at the City University of New York. Contact him at hdubroff@pacbiztimes.com.