Is Inventory a Worthy Indicator of Business Cycles?

Brad Fuller and Duje Grubisic

Abstract

This study examines the question if inventory investment is as valid an indicator of Business Cycles today as it was 20 years ago? With the introduction of new inventory management techniques, like Just-In-Time inventory systems, it is hypothesized the predictive power of inventory investments on business cycles has diminished in the last decade. The findings in this study suggests that changes in inventories, specifically Series 92 data used by the Conference Board, no longer demonstrates the predictive power in identifying business cycle peaks and troughs, and therefore should no longer be used as a leading indicator to forecast economic activity.