Inventory Dynamics and Business Cycles: What Has Changed?

By historical standards, the U.S. economy has experienced a period of remarkable stability since the mid-1980s. One explanation attributes the diminished variability of economic activity to information-technology led improvements in inventory management. Our results, however, indicate that the changes in inventory dynamics since the mid-1980s played a reinforcing–rather than a leading–role in the volatility reduction. A decomposition of the reduction in the volatility of manufacturing output shows that it almost entirely reflects a decline in the variance of the growth contribution of shipments. And although the volatility of total inventory investment has fallen, the decline occurred well before the mid-1980s and was driven by the reduced variability of †We thank Doug Elmendorf, Mark Gertler, Kenneth Kuttner, Andrew Levin, Dan Sichel, Eric Swanson, Stacey Tevlin, Jonathan Wright, and participants of the New York Fed Domestic Research Brown Bag seminar and the Federal Reserve Board macro workshop for helpful comments. Amanda Cox provided outstanding research assistance. The views expressed in this paper are solely the responsibility of the authors and should not be interpreted as reflecting the views of the Board of Governors of the Federal Reserve System, the Federal Reserve Bank of New York, or of any other person associated with the Federal Reserve System.