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…
Read More: Where Shortages Show up: The WTF Plunge in Retail Inventories