Over-stimulated demand, tangled supply chains: shortages for some, plenty of supply for others.
By Wolf Richter for WOLF STREET.
The historic stimulus from $5 trillion in government deficit-spending and from $4 trillion in Fed money-printing within a 16 month period resulted in a historic spike in consumer spending on goods. When the demand shock hit retailers and other companies, they were suddenly confronted with a multi-layered supply shock – after decades of corporate efforts to tighten “lean inventory” strategies ever further, all the way up the supply chain. And there was no buffer for the disruptions.
Inventories at auto dealers, which in normal times account for about 36% of total retail inventories, have evaporated since the spring of 2020, following production halts at automakers, first due to covid, then due to the semiconductor shortage.
The inventory-sales ratio at new and used vehicle dealers and parts dealers dropped to a historic low of 1.15 in April, the lowest in the data going back to 1992, and has roughly stayed there through June, according to data by the Census Bureau on Tuesday. A ratio of 1.0 means the retailer has enough goods on hand for 30 days at the current rate of sales. A ratio of 2.0 means the retailer has 60 days’ supply. For auto dealers, 60 days’ supply is considered healthy. In June, auto dealers had roughly 34 days of supply for the third month in a row:
Over the past two decades, the number of vehicles in inventory, though varying wildly, has stayed in the same range as unit sales have stagnated over the period. But much higher costs per unit led to much higher inventories in dollar terms. For example, the price of the F-150 XLT pickup truck rose 80% from the 2000 model year ($19,410) to the 2021 model year ($35,050), according to the WOLF STREET Pickup Truck and Car Price Index.
But so far this year through June, despite more costly vehicles in inventory, inventories in dollar terms collapsed to $152.9 billion, where they’d first been in 2004:
What kept the inventory-sales ratio (first chart) from plunging even further was a sharp drop in vehicle unit sales in June as dealers had run short on vehicles to sell, and customers, frustrated by lack of choice and by sky-high prices, started walking away, a process that accelerated in July.
Inventories at food and beverage stores took a heavy hit during the empty-shelves phase in March and April 2020 but have now recovered, even as sales at these stores remain historically high, given the shift of consumption from commercial buildings to the home, powered by working-from-home or not working at all. In dollar-terms, inventories hit a new high in March and roughly stayed there through June, at $54.1 billion.
Because the increase in sales compared to the era before the pandemic, the inventory-sales ratio, at 0.72, has remained somewhat below the multi-year range before the pandemic:
Inventories at building materials and garden supply stores (from Home Depot to neighborhood hardware stores) plunged briefly in March through May 2020, as sales skyrocketed. But inventories soon caught up and then shot from record to record, hitting $67.2 billion in June, up 18% from June 2019.
Strong sales at these stores caused the inventory-sales ratio to remain lower than in the pre-pandemic years, but higher than during the housing boom before 2005. Note how sales at these stores surged during housing booms and declined during the last housing bust.
In June, at 1.72, the ratio was back at February and March 2020 levels, and back where it had been in May 2006, as the housing bubble had just started to unravel:
Inventories at clothing and accessory stores had been at a record $55 billion in March 2020, just as the lockdowns were implemented, which caused sales at these stores to collapse, which caused the inventory-sales ratio to spike to 19 months’ supply. When sales resumed, the ratio came back into balance as inventories in dollar terms dropped through the summer 2020.
But earlier this year, as sales spiked to record levels, supply chains couldn’t catch up, and the inventory-sales ratio plunged to record low levels, in June at 1.83:
At general merchandise stores – including Walmart and Costco – inventories in dollar terms plunged during the empty-shelves spring in 2020 but then recovered. In June, at $84.2 billion, it was back where it had been before the pandemic. These stores continue to benefit from consumption having shifted to households due to working from home and not working at all, and the inventory-sales ratio remains near record lows.
Note the long-term trend: Lean inventories strategies have over the past 20 years reduced supply from 60 days in 2000 to less than 40 days:
Overall inventories at all retailers in June remained roughly at $600 billion, first seen in 2016. This was up by only 3.6% from the pandemic low a year ago.
In April, May, and June, the inventory-sales ratio of around 1.08 – or about 33 days’ supply – was at the lowest point in the data going back to 1992. In the years before the pandemic, the overall ratio was around 1.5, providing 45 days of supply. You can see the dominating weight of auto-dealer inventories in overall retail inventories:
If consumer spending shifts further from goods (retail) to services, it further whittles down the historic spike in retail sales, which would help bring supply at retailers closer to the averages of the past few years. But there are still numerous supply chain issues, from semiconductor shortages to shipping and transportation nightmares across the globe, that dog some retail segments, such as auto dealers, and they will continue to struggle to build their inventories.
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