There could be a big change in the economic narrative

The overriding narrative of the market and the economy is one of the lagging behind in meeting strong demand, a dynamic that has pushed up inflation.

While most signs indicate that these trends are continuing, last week’s handful of episodes indicate that this description may change.

Signs that inventory no longer decays

Supply chain disruption is reflected by depressed inventory / sales ratios. In fact, many businesses are complaining that sales will only get stronger if they can keep their shelves.

Business inventory rose 2.0% in March from a month earlier, according to a Census Bureau report released on Tuesday. The inventory / sales ratio improved slightly to 1.27, but was weaker than the historical level.

In an earnings call last week, however, retail behemoths Walmart and Target suggested that the issue may be a thing of the past for them.

“We like the fact that our inventory has increased because we need to have stock at our side counters, but the 32% increase is more than us. We will deal with most or all of the additional inventory in the next few quarters. “- Doug Macmillan, CEO of Walmart“While we expected a post-stimulus slowdown in these segments, and we expected consumers to re-focus their spending away from products and services, we did not anticipate the extent of that change. As I mentioned earlier, this has led us to carry excessive inventory, especially in heavy sections, including kitchen appliances, TVs and outdoor furniture. Brian Cornell, CEO of Target

This is striking Chart Bloomberg’s Kriti Gupta shows how aggressive some big retailers have been in increasing their inventory.

This phenomenon where companies move from under-supply to over-supply is called a “bullwhip effect”. Bloomberg’s Joe Wijenthal explains:

“Demand has increased. Companies aggressively order or even over-order to make sure they have a list. Then the demand changes. Fear of sudden shortages and empty shelves turn into inventory pileup, glut and deflation.

There are two very important things to note about what is happening to these retailers.

First, they are being influenced by the fact that consumers are spending less money on real things and more money on obscure experiences. In fact, United Airlines confirmed as much on Monday when it revised its outlook for summer travel.

Second, it has nothing to do with any unexpected weakness in consumer spending. In fact, Walmart and Target each reported better-than-expected comparative store sales growth. The latest monthly retail sales report from the Census Bureau confirms that consumer power is economy-wide as sales hit a new record in April.

“[Customers’] Expenditure capacity continues to benefit from improved savings rates, higher employment, and healthier wage growth, ”said Target’s colonel.

Signs of improvement during delivery

As demand for the product increases, it takes longer to get order delivery.

However, this delivery time seems to be getting shorter.

According to the New York Fed and Philly Fed Production Survey, suppliers’ delivery time indicators dropped to their lowest levels in May.

However, both of these studies indicate that manufacturing activity in the mid-Atlantic is declining. Thus, it is possible that these shorter delivery times are an act of reducing demand rather than improving the supply chain.

Signs of labor shortage reduction

Walmart, the largest private employer in the United States, and recently the second largest private employer in the country, echoed what Amazon said:

“As the number of Omicron variant cases dropped sharply in the first half of the quarter, more of our colleagues who were on COVID leave returned to work faster than we expected. We hired more collaborators late last year for the vacation, so we ended the week with more stuffing. “- Doug Macmillan, CEO of Walmart“With the emergence of the Omicron variant in late 2021, we have seen a significant increase in the number of complementary network employees on vacation and we are continuing to hire new staff to cover these absences. We were converted into extra staff, which reduced productivity. Brian Olsawski, CFO of Amazon

These statements are very similar, although they reflect unique events for large retailers.

At the same time, however, there has been a pickup in the fridge and pruning episodes in the tech industry.

One of the most popular ways to track the health of the labor market is the number of initial claims for unemployment insurance benefits, which are reported weekly. Although demand levels remain at a 50-year low, there has been a slight increase in recent weeks.

In the week ended May 14, initial claims rose to 218,000, up 21,000 from the previous week. This is the highest level since January.

(Source: DoL)

(Source: DoL)

What does this mean for inflation?

As supply chain disruptions have lasted longer than expected, resulting in deficits, inflation has been much higher than many expected.

And so, the Federal Reserve has responded by tightening monetary policy. They believe that tight financial conditions should cool the labor market, which will cool wage growth, resulting in a cooling of demand to a level that is consistent with supply. This should eventually cool inflation.

The presence of bloated inventory and shorter delivery time will suggest the supply chain is no longer a problem. And hiring fridges and layoffs suggests that wage increases should be cold. Assuming these episodes turn into economic trends, inflation will soon come down.

Zoom out

Again, last week’s headlines are anecdotal, and the economic data steps are quite short.

Then again, most of the big trends start as episodes and there are small changes in the data.

As the story of the economy unfolds, we will keep a close eye on pruning, initial demand, inventory, supplier delivery time, order backlog, and of course, how inflation is reported in different ways.

More from TKer:

Rearview 6

The stock continues to decline: The S&P 500 fell 3.0% last week, marking the seventh week of losses. The index is now down 18.7% from its highest close on January 3, 4796.56. The S&P also touched an intraday low of 3,810.32 on Friday, down 20.9% from its January 4 intraday high of 4,818.62. To learn more about market volatility, read on This And This. If you want to read on bear market, read on This.

3 Powell is horrible: Federal Reserve Chair Jerome Powell warns that the central bank’s efforts to cool inflation could pave the way for a stylish journey into the economy. “There may be some pain involved in restoring price stability,” he said at the Wall Street Journal event on Tuesday.

3 Breaking economic data records: Retail sales hit a new record in April Industrial production activity also rose to a new record level in April. For more on this report, read on This.

3 Retail income whiff: As discussed above, both Walmart and Target reported modest sales growth. However, both companies have struggled with rising costs and their earnings have been disappointing as a result. Shares of Walmart fell 11.3% in their news. Target shares have crashed 24.9%.

3 Mortgage rates tick from their highs down: According to Freddie Mac, the average 30-year fixed rate mortgage rate fell to 5.25% from 5.30% in the previous week.

🏘 Home sales slip: According to the National Association of Realtors (NAR), previously owned home sales fell 2.4% in April to an annual rate of 5.6 million units. Lawrence Eun, chief economist at NAR, said: “High house prices and sharply high mortgage rates have reduced buyers’ activity. “It looks like further declines are coming in the coming months, and we’re likely to return to pre-epidemic home sales activity after significant growth over the last two years.”

6 above the road

Nowadays, that’s what’s happening with inflation. So, all eyes will be on the release of the key PCE price index on Friday, a measure of the Fed’s preferred inflation. Economists estimate that the metric increased 0.3% in April compared to the previous month, jumping 4.9% from the previous year.

The April Sustainable Products Order Report will be released on Wednesday. Orders associated with business investment were at record levels in March. Will the April report be so strong?

1. These rankings come from the Fortune 500 list.

2. Layoffs.fyi is tracking a lot of this technology and startup trimming

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