Seasonal Cycles, Business Cycles, and the Comovement of Inventory Investment and Output

The importance of inventory investment in the business cycle is well known. Its role in the seasonal cycle is less well known. We examine the variation of inventory investment and its comovement with output over the seasonal and business cycles. We measure the deterministic and stochastic seasonal components of monthly disaggregated inventory data and find seasonality contributes about 75 percent of the total variance, similar to the proportion found in GDP. We find that inventory investment and output exhibit high correlation, with similar magnitudes, at seasonal and business cycle frequencies. These findings are consistent with the idea that seasonal cycles and business cycles are propagated through similar mechanisms and suggest that inventory investment may play as important a role in the seasonal cycle as it does in the business cycle