This post was originally published on Tker.co.
The general narrative of the markets and the economy has been one of strong demand meeting lagging supply, a dynamic that has caused inflation to rise.
While most signs suggest these trends persist, anecdotes from the past week suggest this narrative may be changing.
Signs that inventories are no longer depleted
Supply chain disruptions have been reflected in depressed inventory/sales ratios. In fact, many companies have complained that sales would be stronger if they could just keep their shelves stocked.
According to a Census Bureau report released Tuesday, business inventories grew 2.0% in March from the prior month. The inventory/sales ratio improved marginally to 1.27, but remained weak relative to historical levels.
However, on earnings calls last week, retail giants Walmart and Target suggested this problem could be a thing of the past for them.
“We like the fact that our inventory has increased because it takes a lot to stock our side counters, but a 32% increase is higher than we want. We will be working with most or all of the excess inventory in the coming 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 that change. As I mentioned earlier, this led us to carry too much inventory, particularly in bulky categories, including kitchen appliances, televisions, and outdoor furniture.” – Brian Cornell, CEO of Target
this flashy graphic by Kriti Gupta of Bloomberg illustrates how aggressively some of the big retailers have been to increase their inventories.
This phenomenon where companies go from undersupply to oversupply is called the “bullwhip effect.” Bloomberg’s Joe Weisenthal explains:
“Boom in demand. Companies aggressively order or even over-order to ensure they have inventory. So the demand changes. Suddenly, fears of shortages and empty shelves turn into inventory buildups, excesses, and disinflation.”
There are two very important things to note about what is going on with these retailers.
First of all, they are affected by the fact that consumers spend less money on tangible things and more money on intangible experiences. Indeed, United Airlines confirmed as much on Monday when it revised its outlook for summer travel upwards.
Second, this has little to do with unexpected weakness in consumer spending. In fact, Walmart and Target reported better-than-expected comparable store sales growth. The Census Bureau’s latest monthly retail sales report confirmed consumer strength across the economy, as sales hit a new record in April.
“[Customers’] spending power 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 recovered, it took longer and longer to deliver orders.
However, these delivery times seem to be shortening.
According to manufacturing surveys from the New York Fed and the Philadelphia Fed, supplier lead-time indices fell in May to their lowest levels in months.
However, both surveys also noted that manufacturing activity was weakening in the mid-Atlantic. Therefore, it is possible that these shorter lead times are more a function of slowing demand than improvements in the supply chain.
Signs that the labor shortage is easing
Walmart, the largest private employer in the US, echoed something recently said by Amazon, the second largest private employer in the country1:
“As the omicron variant case count declined rapidly in the first half of the quarter, more of our associates who were on COVID leave returned to work faster than we expected. We hired more associates at the end of last year to cover those who were on leave, so we ended up with weeks of overstaffing.” – Doug McMillon, CEO of Walmart“With the emergence of the Omicron variant in late 2021, we saw a substantial increase in licensed compliance network employees and continue to hire new employees to cover these absences. As the variance slowed in the second half of the quarter and employees returned from vacation, we quickly went from understaffed to overstaffed, resulting in lower productivity.” Brian Olsavsky, Amazon CFO
These statements are very similar, although they reflect phenomena unique to large retail companies.
At the same time, however, there has been an uptick in stories of hiring freezes and firings in the tech industry.2 On Tuesday, The Hollywood Reporter first reported that Netflix would lay off 150 employees.
One of the most popular ways to track the health of the labor market is the count of initial claims for unemployment insurance benefits, which is reported 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 claims rose to 218,000, up 21,000 from the previous week. It is the highest level since January.
What this could mean for inflation
Because supply chain disruptions have persisted longer than many anticipated, the resulting shortages have caused inflation to be much higher than many expected.
And so the Federal Reserve has responded by tightening monetary policy. They believe that tighter financial conditions should cool the labor market, which should cool wage growth, which in turn should cool demand to a level more in line with supply. Ultimately, this should cool inflation.
The presence of inflated inventories and shorter lead times would suggest that supply chains are no longer a problem. And hiring freezes and layoffs suggest wage growth should cool. Assuming these anecdotes turn into economic trends, inflation should come down soon after.
Once again, last week’s headlines are anecdotal and the movements in the economic data are quite small.
On the other hand, most big trends start out as anecdotes and small changes in the data.
As the story of the economy unfolds, we’ll be keeping an eye on layoffs, initial orders, inventories, supplier lead times, back orders, and of course all the various ways it’s being reported. inflation.
More from TKer:
rear view mirror 🪞
📉 🐻 Stocks keep falling: The S&P 500 fell 3.0% last week, marking its seventh straight week of losses. The index is now down 18.7% from its January 3 closing high of 4796.56. The S&P also hit an intraday low of 3,810.32 on Friday, 20.9% below its Jan. 4 intraday high of 4,818.62. To learn more about market volatility, read East Y East. If you want to read about bear markets, read East.
🦅 Powell is aggressive: Federal Reserve Chairman Jerome Powell has warned that the central bank’s efforts to cool inflation may lead to a bumpy ride in the economy. “There could be some pain involved in restoring price stability,” he said at a Wall Street Journal event on Tuesday.
🇺🇸 Economic data breaks records: Retail sales rose to a new record in April. Industrial production activity in April also reached a new record level. To learn more about these reports, read East.
🛍 Retail Earnings Puff: As discussed above, Walmart and Target reported decent sales growth. However, both companies struggled with rising costs and their profits were disappointing as a result. Walmart shares fell 11.3% on its news. Target shares plunged 24.9%.
📈 Mortgage rates tick down from their highs: The average rate for the 30-year fixed-rate mortgage decreased to 5.25% from 5.30% the previous week, according to Freddie Mac.
🏘 House Sale Ticket: 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). “Higher home prices and sharply higher mortgage rates have dampened buyer activity,” said NAR chief economist Lawrence Yun. “It looks like there will be more declines looming in the coming months, and we are likely to return to pre-pandemic home sales activity after the notable increase of the past two years.”
Along the way 🛣
These days, it’s all about what’s going on with inflation. Therefore, all eyes will be on Friday’s release of the core PCE price index, the Fed’s preferred gauge of inflation. Economists estimate the metric rose 0.3% in April from a month earlier, which reflects a jump of 4.9% compared to the previous year.
The April Durable Goods Orders report will be released on Wednesday. Orders linked to business investment reached a record level in March. Will the April report be just as strong?
This post was originally published on Tker.co.
¹ These ranks come from the Fortune 500 list.
² Layoffs.fyi has been tracking many of these startup and tech layoffs.
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