In the US, inventories are the smallest component of GDP, but represent the second largest source of fluctuations in quarterly data, after consumption. The cyclical behaviour of inventory investment is driven by shocks to demand and supply conditions, both current and expected. The latter generate precautionary motives for inventory investment. There is no consensus on which shock is more relevant; this work suggests a new methodology to jointly estimate the contribution of each of them.
In the short run, the highest share of fluctuations in inventory investment is explained by firms' sales forecast errors; the precautionary component linked to shocks to future costs gains more relevance at longer horizons. The results are coherent with what observed in the post-pandemic period, when inventory investment made up an exceptionally high share of GDP dynamics.
