Where Shortages Appear: The WTF Plunge in Retail Inventories
How messed up the economy got, fueled by government moolah and Fed manna, when no one and no one was ready for it.
By Wolf Richter for WOLF STREET.
When the government spends trillions of borrowed dollars to stimulate demand on all sides, and when the Fed prints trillions of dollars to monetize the government’s borrowing frenzy and also to inflate asset prices so that Asset holders feel richer and start spending those gains (the Fed doctrine on the wealth effect), well, then you’re going to have a demand, a lot of demand, all of a sudden, especially for goods. And this sudden demand has been ricocheting into the economy for over a year.
And the supply? Duh. Maybe they thought the supply would suddenly materialize. But the supply chains are long and complex, and then there were all kinds of additional issues, from the container shortage, to soaring ocean freight rates, to the blockage of the Suez Canal, to a shortage of capacity among container carriers and freight companies, a fierce winter storm that hit the Texas petrochemical industry and semiconductor factories which then created new grunts in supply chains, while a Fire at a chip factory in Japan has wreaked new havoc with the semiconductor shortage for automakers.
Among commodities, the sudden demand from home builders and renovators for things like lumber has caused all kinds of distortions and supply issues. And retailers have run out of products in a wide range, from bicycles to hot tubs and most importantly – since they weigh so heavily in retail sales – new and used vehicles.
“It turns out it’s a lot easier to create demand than it is to match supply,” Jerome Powell said at the press conference. And now the economy has the biggest mess in decades to deal with.
This mess has appeared in inventories, which also indicates that it will take some time to straighten out.
Inventories at retailers, from grocery stores to new and used vehicle dealers, fell to $ 602 billion in April, down about 9% from April 2019, according to the Census Bureau, even as retail sales soared 20% over the same period, producing the lowest inventory-to-sales ratio in data history since 1992:
The inventory-to-sales ratio (inventories divided by sales) is a measure in the retail industry to show whether retailers are overstocked, or under-stocked, at a given sales level. Since inventory and sales are measured in dollars, the effects of inflation are canceled out in the ratio. The peaks in the graph above were the brief periods when retail sales collapsed, pushing up the inventory-to-sales ratio. This has happened twice this century, during the Lehman moment from September to December 2008, and in March and April 2020.
New and used vehicle dealers face strong demand from retail customers, but their supply is under great pressure. On the new vehicle side, the semiconductor shortage has affected vehicle production globally.
On the used vehicle side, it was the collapse of the car rental business in 2020 that triggered a collapse in orders from rental companies for new vehicles to put in their fleets, which triggered a shortage of cars. rental in 2021 as travel resumes, prompting car rental companies, desperate to expand their fleets, to hold onto the vehicles they own, instead of selling vehicles from their fleets. The rental vehicle market has more than 2 million vehicles per year. And that whole flow was turned upside down, and dealers, desperate for inventory, drove wholesale auction prices up into the stratosphere.
And inventories at motor vehicle dealers and auto parts dealers plunged to $ 162 billion, for a record inventory-to-sales ratio of 1.15, while a ratio of around 2 is considered healthy. The two peaks of late 2008 and spring 2020 were the months when sales collapsed:
Sales of motor vehicles and parts represent about 22% of total retail sales. Excluding auto and parts sales, the inventory-to-sales ratio at “ex-auto” retailers edged up in April, from its all-time low of 1.04.
This “non-car” inventory-to-sales ratio illustrates decades of efforts to achieve ever-tighter control of retail inventory outside of car dealerships, with ever-smaller inventory relative to sales, which was the last point. One of the conditions that contributed to the shortages: lack of inventory when supply chains got tangled and demand suddenly took off.
With two retail segments, the ratio deteriorated further in April: automobile and parts dealers and furniture dealers. At other retailers, the ratio increased, including building material and garden supply stores (like Home Depot), clothing stores, general merchandise stores (like Walmart) and department stores.
Food and beverage stores live in their own world amidst perishable goods that require tight, finely tuned stocks. The inventory-to-sales ratio normally remains relatively stable. But when panic buying in supermarkets took hold in March 2020, with stores running out of products like pulp and toilet paper, inventory collapsed amid empty shelf syndrome, and the inventory-to-sales ratio. collapsed with it, hitting an all-time low of 0.59 in March 2020.
Panic buying has finally ceased and inventories have caught up to some extent, but sales remain high as some consumption has shifted from office to home, and the inventory-to-sales ratio, now at 0.74 , remains below historical levels. Note that the Lehman moment hardly had an impact on supermarkets, but 9/11 did for just a moment:
These charts show how the economy has deteriorated, hit by a sudden surge in WTF demand at the retail level, fueled by the government moolah and the Fed’s windfall, while no one and nothing is was ready for it.
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