Stimulus-fueled blow-off demand spike meets messed-up supply and transportation chaos.
By Wolf Richter for WOLF STREET.
Retailers are trying to stock up for the holiday selling season. But they’re facing all kinds of shortages, supply snags, transportation chaos, and surging prices. And overall and supply has remained at record lows for four months in a row.
Stimulus-fueled retail sales started spiking last year, culminating in a mind-blowing free-money blow-off top in April. In the months since then, retail sales have tapered off a wee bit but remained close to the tippy-top of this free-money blow-off spike.
The inventory-sales ratio (inventories divided by sales, a standard metric of supply, which cancels out the impact of inflation) started collapsing last year. In May this year, it hit an all-time low in the data going back to 1992. In July, according to the Commerce Department on Thursday, the inventory-sales ratio ticked up a tiny bit, as a result of a small decline in retail sales in July from the free-money blow-off spike, but remained near the lowest levels in the data.
The 2008 spike occurred when retail sales suddenly plunged as auto sales collapsed after the Lehman bankruptcy. The second spike occurred in March and April 2020 when retail sales collapsed during the lockdowns.
A ratio of 1 says that the retailer has enough goods in inventory for one month of sales at the current rate of sales – in other words, 30 days’ supply. A ratio of 2 means 60 days’ supply.
The overall inventory-sales ratio of 1.1 in July means roughly 33 days’ supply, when 40 to 45 days’ supply was normal before the pandemic.
In dollar terms, overall inventories ended July at $603 billion, unchanged since April, and down 9.3% from two years ago. But these dollar-inventories have been inflated by higher product costs due to rampant inflation up the supply chains, including used-vehicle wholesale prices that soared by 24% year-over-year in July and nearly 40% from two years ago, and by a shift to higher-end vehicles among new car dealers.
Catastrophic shortages at auto dealers.
Inventories at new and used vehicle dealers and parts stores normally account for over one-third of total retail inventories. In terms of the number of vehicles, not dollars, retail sales and inventories have bounced around in the same range for 25 years. This is not exactly a growth industry.
But this year, inventories collapsed due to the semiconductor shortage that has triggered rotating shutdowns of assembly plants in the US and around the globe, while strong demand in March and April depleted inventories.
For the three months of May, June, and July, inventories at auto dealers were stuck at around $153 billion, a level first seen in 2004, when vehicles were a lot cheaper than today – for example, according to the WOLF STREET “F-150 & Camry Price Index,” the MSRP of the F-150 XLT was $22,000 in 2004 and $35,000 in 2021.
During the months following the Lehman bankruptcy, new vehicle sales collapsed, and the country was suddenly awash in inventory that suddenly couldn’t be sold. GM and Chrysler and a bunch of component makers filed for bankruptcy.
In this crisis, the opposite has taken place: Fueled by $4 trillion in money-printing and by $5 trillion in government deficit spending, retail demand surged, even as supply was constrained first by Covid issues in the manufacturing sector, then by the semiconductor shortage and other shortages in supplies and components.
And the inventory-sales ratio for auto dealers and parts stores – which cancels out the impact of price increases – dropped to 1.14 in May, the lowest level in the data going back to 1992. Since May, sales have plunged as dealers have run out of inventory to sell. The drop in unit sales over the period caused the inventory-sales ratio to tick up just a bit by July to 1.22, meaning about 37 days’ supply, at those depressed sales!
Clothing and accessory stores, in bad shape for the holiday sales.
In March and April 2020, as sales collapsed, unsold inventory piled up to a record $54 billion. And the inventory-sales ratio spiked to 19 during that time.
Then clothing sales recovered and ate up the excess inventory, and then supply issues started cropping up and have worsened. And sales started hitting records, and currently are up 15% from two years ago.
In dollar terms, inventories have been stuck near the pandemic low, in July at $48 billion. But surging sales caused the inventory-sales ratio to plunge to a record low in June and stay there in July:
Food and beverage stores, tight.
Supermarkets have recovered from the empty-shelves phenomenon in March and April 2020, caused by panic buying and a shift in consumption from work and restaurants to the home.
But demand remains higher than before the pandemic, as the shifts in consumption have continued. Food and beverage stores have stocked up, and prices have increased too, and in dollar terms, inventories rose to a record $55 billion in July.
But given the surge in sales compared to normal times – sales were up 15% from two years ago while inventories were up just 6.5% — the inventory-sales ratio remained stuck in the same low range since August 2020. Shoppers have seen this play out as their stores, now generally reasonably well stocked, suddenly run out of some items that they’d run out before:
General merchandise stores, still near record lows.
Inventories in dollar terms, after the empty shelves phase in the spring last year – rebounded and then reached a new record in June, and rose further in July to $87 billion. But sales at these stores – they include Walmart, Costco, Target, etc. – are up 18% from two years ago, which left the inventory-sales ratio near record lows.
The long-term trend is marked by ever stricter lean inventories strategies that have reduced supply from 60 days in 2000 to about 40 days before the pandemic:
Building materials and garden supply stores, supply back to old normal as sales drop.
In dollar terms, inventories have been rising from record to record, but sales spiked too. By stimulus-miracle March, sales had exploded nearly 40% from March 2019, leaving retailers with very tight inventories. Since March, however, sales have fallen off -9% as the DIY boom is fading, and inventories have continued to rise, reaching a record of $68 billion in July.
As a result of declining sales and rising inventories, the inventory-sales ratio has rebounded from record lows to a level that in July was close to the old normal range:
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