Perhaps Say’s Law doesn’t hold?

Britain’s manufacturers cranked up in May, raising hopes that the economy has escaped the slow patch in the opening months of the year.

Last month factory output grew at the strongest pace so far this year. The relevant segment of IHS Markit’s purchasing managers’ index – an influential private sector survey – hit 56.9 in May, up from 55.4 in April and well above the 50-level which denotes no change on the month.

However, domestic demand remains sluggish and much of the extra output has gone into rebuilding stockpiles of goods, rather than being sold to customers.

That is, supply doesn’t create its own demand?

There is something here though. Back in that Great Moderation people were wondering why it was moderate? One point being those stock levels. JIT and all that meant that stock levels across the economy were very much lower than they used to be. We just didn’t need to have 2 or 3 or 6 month’s supply of crud in order to keep ticking over. And stock levels varying was one of the great drivers of both boom and bust.

So, lower stock levels in general and booms and busts would be less extreme – moderation.

Note that it took a financial crisis, not the more usual boom and bust of the economy in general, to have a recession.

4 comments on “Perhaps Say’s Law doesn’t hold?

  1. Whatever else is suggests, it suggests that Britain’s manufacturers are pretty confident about the future. Brexit or not.

    They are producing stuff they can’t sell which suggests they expect to sell more in the future.

  2. Interesting to note that China seems to build very large inventories as a matter of policy at times. That makes if difficult to judge the actual underlying real demand. This is something of a risk to my business, but time will tell just how much of a risk it really is.

  3. To the extent that (i) supply of material goods creates demand for components and (ii) that when increased supply reduces price and there is increased demand as a result of the lower price then it can. However case (ii) is merely liberating a pre-existing potential demand that was constrained by the price.
    I think the EU wine lakes and butter mountains conclusively demonstrated that supply does NOT per se create its own demand.

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