A major shift in the economic narrative could be underway
The general narrative in the markets and economy has been one of strong demand in the face of lagging supply, a dynamic that has caused inflation to spike.
While most signs suggest these trends are persisting, a few anecdotes from the past week suggest that this narrative may be changing.
Signs that stocks are no longer sold out
Supply chain disruptions resulted in depressed inventory-to-sales ratios. In fact, many businesses complained that sales would be stronger if only they could keep their shelves stocked.
According to a Census Bureau report released Tuesday, business inventories rose 2.0% in March from the previous month. The inventory-to-sales ratio improved slightly to 1.27, but remained low compared to historical levels.
In earnings calls last week, however, retail giants Walmart and Target suggested that this problem may be a thing of the past for them.
“We appreciate that our inventory is up because it takes so much to be stocked on our side counters, but a 32% increase is more than we want. We will process most or all of the excess inventory over the next two quarters. – Doug McMillon, CEO of Walmart“While we anticipated a post-stimulus slowdown in these categories and expected consumers to continue to refocus their spending on goods and services, we did not anticipate the magnitude of this shift. mentioned earlier, this has led us to have too much inventory, especially in large categories including kitchen appliances, TVs and outdoor furniture.“ – Brian Cornell, CEO of Target
This striking chart by Bloomberg’s Kriti Gupta illustrates how aggressive some of the big retailers have been in increasing inventory.
This phenomenon where companies go from being undersupplied to oversupplying is called the “whiplash effect”. Bloomberg’s Joe Weisenthal explains:
“Demand explodes. Businesses aggressively order or even over-order in order to ensure they have inventory. Then demand shifts. Suddenly fears of shortages and empty shelves turn into stockpiles , gluts and disinflation.”
There are two very important things to note about what is happening with these retailers.
First, they are affected by consumers spending less money on tangible things and more money on intangible experiences. In fact, United Airlines confirmed as much on Monday when revising its outlook for summer travel.
Second, it has little to do with unexpectedly weak consumer spending. In fact, Walmart and Target each posted better-than-expected same-store sales growth. The Census Bureau’s latest monthly retail sales report confirmed consumer strength across the economy, with sales hitting a new record high in April.
“[Customers’] spending capacity continues to benefit from high savings rates, high employment and healthy wage growth,” Target’s Cornell said.
Signs that delivery times are improving
As demand for goods rebounded, it took longer and longer for orders to be delivered.
However, these delivery times seem to be getting shorter.
According to manufacturing surveys from the New York Fed and the Philadelphia Fed, the indices of supplier delivery times fell in May to their lowest levels in months.
However, both of these surveys also signaled that manufacturing activity was weakening in the mid-Atlantic. It is therefore possible that these shorter delivery times are more a function of a slowdown in demand than improvements in the supply chain.
Signs that labor shortages are easing
Walmart, the largest private employer in the United States, echoed a recent statement from Amazon, the nation’s second-largest private employer1:
“While the number of omicron variant cases declined rapidly in the first half of the quarter, more of our associates who were on COVID leave returned to work faster than expected. We hired more associates late last year to replace furloughed people, so we ended up with weeks of overstaffing. – Doug McMillon, CEO of Walmart“With the emergence of the Omicron variant at the end of 2021, we have seen a substantial increase in the number of distribution network employees on leave, and we continue to hire new employees to cover these absences. As the variance subsided in the second half of the quarter and employees returned from furlough, we quickly went from understaffed to overstaffed, resulting in lower productivity . » Brian Olsavsky, CFO of Amazon
These statements are very similar, although they reflect phenomena specific to mass distribution.
At the same time, however, there has been a revival of anecdotes of hiring freezes and layoffs in the tech industry.2 On Tuesday, The Hollywood Reporter reported for the first time that Netflix will be laying off 150 employees.
One of the most popular ways to track the health of the labor market is the tally of initial claims for unemployment insurance benefits, which is released weekly. While the level of claims remains near 50-year lows, there has been a slight uptick in recent weeks.
In the week ending May 14, initial inquiries rose to 218,000, up 21,000 from the previous week. This is the highest level since January.
What this could mean for inflation
Because the supply chain disruptions persisted longer than many expected, the resulting shortages caused much higher inflation than many expected.
And so, the Federal Reserve reacted by tightening its monetary policy. They believe that tighter financial conditions should cool the labor market, which should dampen wage growth, which in turn should cool demand to a level more in line with supply. This should ultimately cool inflation.
The presence of bloated inventories and shorter lead times would suggest that supply chains are no longer an issue. And the hiring freeze and layoffs suggest wage growth is set to slow. Assuming these anecdotes turn into economic trends, inflation should come down soon after.
Again, the headlines over the past week are anecdotal and the moves in the economic data are fairly small.
Again, most big trends start with anecdotes and small changes in data.
As the story of the economy unfolds, we’ll be watching closely for layoffs, initial claims, inventory, supplier lead times, order books, and of course all the different ways whose inflation is reported.
📉 🐻 Stocks continue to fall: The S&P 500 fell 3.0% last week, marking its seventh consecutive week of losses. The index is now down 18.7% from its January 3 closing high at 4796.56. The S&P also hit an intraday low of 3,810.32 on Friday, 20.9% below its January 4 intraday high of 4,818.62. To learn more about market volatility, read this and this. If you want to know more about bear markets, read this.
🦅 Powell is hawk: Federal Reserve Chairman Jerome Powell has warned that the central bank’s efforts to calm inflation could create a bumpy ride in the economy. “There could be difficulties in restoring price stability,” he said at a Wall Street Journal event on Tuesday.
🇺🇸 Economic data breaks records: Retail sales hit a new record high in April. Industrial production activity in April also hit a new record high. To learn more about these reports, read this.
🛍 The smell of retail revenue: As noted above, Walmart and Target both saw decent sales growth. However, both companies struggled with rising costs and their earnings were disappointed as a result. Walmart shares plunged 11.3% on their news. Target stocks fell 24.9%.
📈 Mortgage rates drop from their highs: The average rate on the 30-year fixed-rate mortgage fell to 5.25% from 5.30% the previous week, according to Freddie Mac.
🏘 Home sale slip: Existing home sales fell 2.4% in April to an annualized rate of 5.6 million units, according to the National Association of Realtors (NAR). “Rising house prices and sharply rising mortgage rates have reduced buyer activity,” said NAR chief economist Lawrence Yun. “It looks like more declines are imminent in the coming months, and we will likely return to pre-pandemic home sales activity after the remarkable uptick of the past two years.”
Up the road 🛣
These days it all depends on what happens with inflation. So all eyes will be on Friday’s release of the PCE core price index, the Fed’s favorite inflation gauge. Economists estimate the measure rose 0.3% in April from the previous month, reflecting a 4.9% jump from a year earlier.
April’s durable goods orders report will be released on Wednesday. Business investment orders hit a record high in March. Will the April report be as strong?
1. These rankings are from the Fortune 500 list.
2. Layoffs.fyi tracked many of these tech and startup layoffs.
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