Overproduction, Aggregate Earnings, and GDP Growth

Abstract

This paper explores possible links between overproduction and future gross domestic product (GDP) growth. Specifically, we examine the direct effect of overproduction on future GDP growth as well as the moderating effect of overproduction on the relation between aggregate earnings growth and future GDP growth as documented in the literature. We find that overproduction mitigates the positive association between aggregate earnings growth and one-quarter-ahead nominal GDP growth while showing no significant direct effect on future GDP growth. Interestingly, this negative moderating effect is strong enough to reverse the positive association between aggregate earnings growth and one-quarter-ahead GDP growth into a negative association in overproduction periods. We also find that macro forecasters do not fully incorporate the negative moderating effect of overproduction with respect to future GDP growth. Overall, this paper contributes primarily to the literature that links accounting information to GDP growth by identifying overproduction as a moderating factor.

Keywords: Overproduction, Aggregate earnings, Gross domestic product (GDP)

JEL Classification: E01, M41