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'The greatest story for the 2022 outlook yet untold'

·Contributor
·7 min read
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A version of this post was originally published on TKer.co.

You might have noticed that your options at the store are more limited than usual. This is because of the supply chain issues we all hear about every day.

And don’t bother asking sales reps if they have more of anything in the backroom or the warehouse. Inventory levels across all industries are depleted.

According to Census data released Tuesday, the inventory/sales ratio¹ for all businesses stood at 1.26 in September, down from 1.35 during the prior year. Back in September 2019, before the pandemic disrupted the supply chain, this ratio was elevated at 1.43.

For retailers specifically, the inventory/sales ratio was just 1.09 in September, down from 1.47 during the same month in 2019. In other words, retailers are selling stuff almost as quickly as it gets stocked.

“A sizeable inventory build is coming,” Ellen Zentner, chief U.S. economist at Morgan Stanley, wrote last Sunday. “The substantial swing in inventories as clogged supply chains ease is the greatest story for the 2022 outlook yet untold.“

Retailers’ inventory levels are very low. (Source: FRED)
Retailers’ inventory levels are very low. (Source: FRED)

Inventory building will juice GDP in 2022

Economists agree that these low inventory levels present a big tailwind for the economy.

“Much of the very strong demand for goods this year was met by running down stockpiles,” Michael Feroli, chief U.S. economist at JPMorgan, wrote on Wednesday. “Most business sentiment gauges indicate the level of inventories is uncomfortably low, and we expect replenishing stocks could add 0.5%-pt to GDP growth next year.“

It’s hard enough to get someone to come to your store. When your inventories are “uncomfortably low,” you risk not having what the customer wants. And having to turn potential customers away because of lack of inventory can become a costly missed opportunity.

Almost empty shelves are seen at Mary Arnold Toys, New York city oldest toy store on August 2, 2021. (Photo by KENA BETANCUR/AFP via Getty Images)
Almost empty shelves are seen at Mary Arnold Toys, New York city oldest toy store on August 2, 2021. (Photo by KENA BETANCUR/AFP via Getty Images)

Of course, there’s also the risk of having too much inventory. But that risk seems limited considering the amount of spending that consumers and businesses have the capacity to do right now.

“Strong demand and a substantial backlog of orders will keep businesses incentivized to continue rebuilding inventories, while supply-chain disruptions are expected to dissipate over the coming quarters,” Mahir Rasheed, U.S. economist at Oxford Economics, wrote on Tuesday. “Inventory rebuilding is expected to add 0.5ppts to GDP growth in 2022, its highest contribution since 2010.“

Higher inventory levels could lead to more spending as desired goods become more readily available.

Bonus benefit

Clearances and promotional pricing are things that haven’t been happening much lately because businesses have been selling out of a lot of things at full price. This helps to explain why it feels like you’re spending more than usual: You’ve been paying full price for more goods than you were before the pandemic.

The inventory rebuild should also bring some relief to consumers’ pocketbooks.

Higher inventory levels mean more options for customers, and it also leads to lots of discounts as businesses will have more excess inventory to clear out.

In case you missed it, here’s what I wrote last week:

  • Morgan Stanley predicts U.S. stocks will fall by 6% over the next year. I could argue that’s actually bullish. (Link)

  • Americans’ sentiment toward the economy is pretty low these days. And yet, they’re shopping at record rates. There’s a simple explanation for this. (Link)

Rearview

📈 Stocks set new record highs! Before dipping modestly on Friday, the S&P 500 closed at a record high 4,704 on Thursday. The index is up a whopping 25% year to date.

🍗 Inflation: The cost of Thanksgiving dinner is up 14% from a year ago, according to the Farm Bureau. A 16-lb turkey is going for about $23.99 right now, up 24% from $19.39 a year ago. For more on what’s driving inflation, read this.

🛍 Retail sales are holding up: According to Census data released on Tuesday, retail sales were a record $638.2 billion in October, a 1.7% jump from September. This reflected an acceleration from September’s 0.8% growth rate, and it was stronger than the more modest 1.4% growth rate expected by economists. For more on this, read this.

🤑 Pricing power: One of the big surprises of the year has been the degree to which companies have raised prices and the willingness of consumers to pay. This trend really hit a high point this week when TJX, the parent company of T.J. Maxx and Marshall’s, said it raised prices and saw “no pushback” from its customers. Keep in mind that people go to these stores specifically for markdowns. For more on companies raising prices and consumer taking it, read this and this.

🛠 Manufacturing is picking up: According to surveys conducted by the New York Fed and Philly Fed, manufacturing activity is accelerating in the northeast and mid-Atlantic regions.

🚢 Supply chain relief: According to Port of Los Angeles Executive Director Gene Seroka, one of the country’s busiest ports is seeing bottlenecks loosen up. Via the AP: “Since Oct. 24, the port witnessed a 25% drop in the number of import containers on the docks — from 95,000 to 71,000. During the same time, cargo sitting nine days or longer dropped by 29%.“

Container ships wait off the coast of the congested Ports of Los Angeles and Long Beach in Long Beach, California, U.S., October 1, 2021.      REUTERS/ Alan Devall
Container ships wait off the coast of the congested Ports of Los Angeles and Long Beach in Long Beach, California, U.S., October 1, 2021. (REUTERS/ Alan Devall)

🚜 Labor wins: Striking has paid off for some workers. Via AP: “Deere & Co. workers approved a new contract Wednesday that will deliver 10% raises immediately and end a monthlong strike for more than 10,000 employees… In addition to the initial raises, this week’s offer kept the 5% raises that were in the third and fifth years of the six-year deal and 3% lump sum payments in the second, fourth and sixth years of the deal. The offer would also provide an $8,500 ratification bonus, preserve a pension option for new employees, make workers eligible for health insurance sooner and maintain their no-premium health insurance coverage.”

🤔 Passive > Active: It’s hard to beat the market. According to S&P Dow Jones Indices, 58.2% of actively managed large cap equity funds lagged the S&P 500 during the 12 months ending in June. Historically, it’s been the case that most pros trying to outperform the market end up underperforming. It helps to explain why passively managed S&P 500 index funds are so popular.

Up the road 🦃

There’s a healthy amount of economic reports this week.

Monday comes with the October existing home sales report. Tuesday comes with the preliminary November manufacturing PMI survey. Wednesday comes with the October durable goods report, the October personal income and spending report, the October new home sales report, and final November consumer sentiment report from the University of Michigan.

There’s a strong likelihood that these reports will reaffirm the big themes defining the economy right now: The housing market is hot with sky high prices, but sales are being held back due to limited inventory; orders for durable goods are elevated, but there’s a big backlog of work due to supply chain issues; manufacturing activity may have accelerated or decelerated, but either way it’s still growing; incomes are holding up as more people go back to work and those who are already working get raises; and consumer sentiment is in the dumps because inflation is high.

All that is to say you can probably take a break from worrying about the economy and the markets for a few days. The U.S. stock exchanges will be closed for Thanksgiving. And while they’ll be open from 9:30 am ET to 1:00 pm ET on Friday, any activity will come with the caveat that it happened “on low trading volumes.”

A version of this post was originally published on TKer.co.

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¹ The inventory/sales ratio reflects how much of a business’s inventory goes out as a sale in a month. If the ratio is at 2.0, then the business stocks twice the amount of goods that it sells. If the ratio is at 1.0, then goods are getting sold as quickly as it gets stocked.

Sam Ro is the author of TKer.co. Follow him on Twitter at @SamRo.

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