October 26, 2021 | Inventory Build Belies Shortage Hype

As propaganda promotes panic about a shortage of goods for the holiday season, it is critical to understand mass psychology.

Unless people believe that supplies will be tight and prices continue to escalate, there is no urgency to pre-order or stockpile. If it’s believed that supply will be plentiful and prices likely to fall, behaviour flips to deferring discretionary consumption and waiting for liquidation sales. Thus, those in the business of selling things naturally have a bias to forecasting strong demand.

The pandemic-induced leap in goods’ consumption between March 2020 and June 2021 overwhelmed international delivery chains. This caused delays in getting some goods and prompted manufacturers and sellers to anticipate orders and build their inventories (similar to what happened in 1999 during the Y2K anticipatory panic). In the near term, this further clogged the delivery pipeline. But high prices incentivize supply much more than demand, and therein lies the path of mean reversion.

As the Wall Street Journal reported last week, a frenzy to build up supply domestically, closer to customers, drove U.S. warehouse availability to record lows in the third quarter, even as industrial space was converted to storage facilities. If there were not a surge in goods on hand, there would not be a surge in warehousing.

As shown below from Alhambra’s Jeffrey Snider, ex-petroleum and motor vehicles (which have unique constraints at present), wholesale inventories (dotted line) have surged with wholesale sales (orange) over the past year. Also, see Jeffrey’s cogent article, What *Seems* inflation now is something else entirely.

The ongoing rush to increase inventories presumes a continuation of above-average demand. In reality, however, U.S. durable goods orders contracted 43% between May and September as pent-down demand, ending income supplements, and high prices drove surveyed consumer intentions to buy goods to a 40-year low.

The St Louis Fed’s seasonally adjusted Q3 final sales (which deducts inventory rebuilding) is now -1.6% from 6.96% at the end of June.

It’s not about a shortage of goods. What we have here is a massive inventory overhang in the making; that’s not inflationary nor supportive of economic growth in 2022.

Danielle Park October 26th, 2021

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