How messed up the economy has become, fueled by government moolah and Fed manna, when nothing and no one was ready for it.
By Wolf Richter for WOLF STREET.
When the government spends trillions of borrowed dollars to boost demand from all sides, and when the Fed prints trillions of dollars to monetize the borrowing binge by the government and also to inflate asset prices so that asset holders feel richer and start spending these gains (the Fed’s doctrine of the Wealth Effect), well, then you’re going to get some demand, a lot of demand, suddenly, particularly for goods. And this sudden demand has been ricocheting through the economy for over a year.
And supply? Duh. Maybe they thought supply would suddenly materialize. But supply chains are long and complex, and then there were all kinds of additional issues, ranging from container shortages, spiking ocean-freight container rates, the blockage of the Suez Canal, a capacity shortage among container carriers and freight companies, a ferocious winter storm that hit the Texas petrochemical industry and semiconductor plants that then created further snarls in supply chains, while a fire at a chip plant in Japan wreaked further havoc with the semiconductor shortage for automakers.
Among commodities, sudden demand from homebuilders and remodelers for things like lumber caused all kinds of distortions and supply issues. And retailers ran out of products across a wide spectrum, from bicycles to hot tubs and importantly – since they weigh so heavily in retail sales – new and used vehicles.
“Turns out it’s a heck of a lot easier to create demand than it is to bring supply up to snuff,” Jerome Powell mused at the press conference. And now the economy has the biggest mess in decades to deal with.
This mess has shown up in inventories, which also indicates that this will take a while to get straightened out.
Inventories at retailers, from grocery stores to new and used vehicle dealers, dropped to $602 billion in April, down about 9% from April 2019, according to the Census Bureau, even as retail sales skyrocketed 20% over the same period, producing the lowest inventory-sales ratio in the history of data going back to 1992:
The inventory-sales ratio (inventories divided by sales) is a metric in the retail industry to show whether retailers are overstocked or understocked, at a given level of sales. Since both inventories and sales are measured in dollars, the effects of inflation get canceled out in the ratio. The spikes in the chart above were the brief periods when retail sales collapsed, which pushes up the inventory-sales ratio. This happened twice this century, during the Lehman moment in September through December 2008, and in March and April 2020.
New and used vehicle dealers have been encountering strong demand from retail customers, but their supply has come under heavy pressure. On the new vehicle side, the semiconductor shortage has been hitting vehicle production globally.
On the used vehicle side, it was the collapse of the rental car business in 2020 that triggered a collapse in orders from rental car companies for new vehicles to put into their fleets, which triggered a shortage of rental cars in 2021 as travel picked up, which is causing rental car companies, desperate to increase their fleets, to hang on to their vehicles that they do have, instead of selling vehicles from their fleets. The rental vehicle market churns over 2 million vehicles a year. And that whole flow has been thrown into disarray, and dealers, desperate for inventory, have bid up prices at wholesale auctions into the stratosphere.
And inventories at motor vehicle dealers and at auto parts dealers plunged to $162 billion, for a record low inventory-sales ratio of 1.15, when a ratio of about 2 is considered healthy. The two spikes in late 2008 and spring 2020 were the months when sales collapsed:
Motor vehicles and parts sales account for about 22% of total retail sales. Without auto and auto-parts sales, the inventory-sales ratio at retailers “ex-auto” ticked up a minuscule bit in April, from its record historic low, to 1.04.
This “ex-auto” inventory-sales ratio depicts the decades long efforts to get an ever tighter control on retail inventories outside of auto dealers, with ever smaller inventories on hand in relationship to sales, which was one of the conditions that contributed to the shortages: the lack of inventories when supply chains got tangled up and demand suddenly took off.
With two retailer segments, the ratio deteriorated further in April: auto & auto parts dealers, and furniture dealers. At other retailers, the ratio ticked up, including building material and garden supply stores (such as Home Depot), clothing stores, general merchandise stores (such as Walmart), and department stores.
Food and beverage stores live in their own world amid perishable goods that require tight and finely tuned inventories. The inventory-sales ratio remains relatively stable normally. But when the panic-buying at supermarkets set in in March 2020, with stores running out of things like pasta and toilet paper, inventories collapsed amid the empty-shelf syndrome, and the inventory-sales ratio collapsed with it, hitting a historic low of 0.59 in March 2020.
Panic buying eventually stopped, and inventories caught up to some extent, but sales remain hot as some consumption has shifted from the office to the home, and the inventory-sales ratio, now at 0.74, remains below historical levels. Note that the Lehman moment had practically no impact on supermarkets, but 9/11 did for just a moment:
These charts are signs of just how messed up the economy has become, hit by a sudden WTF spike in demand at the retail level, fueled by government moolah and Fed manna, when nothing and no one was ready for it.
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