The Census Bureau released its forward estimates for March trade on Thursday. These include, among other accounts such as imports and exports, preliminary results reported by retailers and wholesalers. This means, for our purposes, inventories.
Oh my god, was there always more inventory. It was apparently widely expected that following an avalanche of goods that had accumulated over the past five months, the situation might calm down a bit. Analysts had estimated that wholesale inventories, for starters, could have risen 0.9% from February to March after jumping 2.5% from January to February.
No sir. On the contrary, wholesale inventories jumped again, by another 2.3% month-over-month in March. And that was on top of a slightly higher revised estimate for February.
Retail inventories (excluding autos and parts) are thought to have risen 0.5% last month. The Census says it was another blockbuster, also up a whopping 2.3% month over month.
These results are just as staggering as they appear at first sight. Only once, in May 2011, have wholesale inventories increased by more than 2% in the same month. It has now happened four more times in the last six (and November was close to the same threshold, making almost five).
March’s 2.3% rate was the second highest on record, behind only February’s revised rate, meaning two in a row at rates not seen before.
The situation is even more remarkable in the retail trade. The largest gain over a previous month was in December 2018. This has since been surpassed by each month since December the big chunk of 2021; now do four times in a row surpassing the previous record.
On an annual basis, wholesale inventories rose 21.2%, while retail inventories (again excluding motor vehicles) jumped 17.5%.
Yet these numbers also coincide with some of the most significant price changes in recent memory. This naturally raises the question, are these all price increases? Has the inventory side of the goods economy been hit by the same confusing price illusion across the same segment of the global economy?
Buying more, getting less would, in this context, suggest less physical inventory that just costs more. Less of a space issue and perhaps sales, although still uncomfortable with working capital.
the qualified The answer is yes, the illusion has definitely inflated inventory figures, which are estimated by value rather than volume. However, the values are largely at cost rather than retail, meaning it’s unclear by how much.
To try and get to the bottom of it, I simply deflated the inventory estimates by the CPI, because the CPI has risen higher and faster than the PCE deflator (and using the PPI goes further in the direction of oranges than apples we are looking for). You can argue that neither are compatible with our purpose, and that’s fair, though I think they’re pretty close, because that kind of precision is unnecessary – as you’ll see.
Broadly speaking, the deflated inventory numbers absolutely show that while price swings have boosted values, there is also almost certainly an underlying accumulation of physical supply.
Let’s start at the wholesale level of the supply chain. According to my deflation on the back of the envelope, inventories here are up 10.5% in constant 1982-84 dollars from July of last year and including the latest estimate for March. This is, by far, the fastest “volume” inventory expansion in the series.
It compares in absolute terms to Reflation #2 (until January 2015) as well as when the economy finally started to recover in 2003 after the dot-com recession in 2001 – all three around 11%. However, to reach the same level of CPI-adjusted increase, it took wholesalers much longer in these two previous periods.
The same was true for Reflation #1, the initial period following the Great “Recession” (Euro$ #1). Although the relative accumulation ended up being larger, it also took a lot longer to get there. Thus, there is a certain priority for the Cut from restocking to the wholesale level, but considering the pace, there’s really is not.
Retailers have placed themselves in another clear category – just look at the table above. You can already tell, even by the value estimates provided by the census, that what is happening is unusual. Taking more into account the CPI, and that does not change.
The closest comparison is for the same period 2003-05. At the time, deflated retail inventory (ex MV) gained 7.1% during the restocking phase of this recovery, which spanned a relatively reasonable 20 months across calendars.
This current restock added much more to 8.9% and then did in just five months.
And retailers have been much more averse to stockpiling than wholesalers.
What this shows is that there is every chance that what is really going on in the goods economy is just what it seems. Prices are up, of course, and so are volumes. Products that were over-ordered last year for fear of endless supply and transportation problem have indeed flooded the country, both at wholesale and retail level, in an extraordinary way.
Apart from the census inventory estimates, here is more confirmation:
The U.S. Logistics Manager’s Index hit a record high of 76.2 in March 2022 as continued inventory congestion pushed up inventory costs (91 vs. 90.3), l warehousing (90.5 vs. 86.4) and aggregate logistics costs at a record high. levels. This puts even more pressure on an already limited capacity which has reached an all-time low (36.1 against 42.4).
What happens to all those still unsold things floating around the US economy rather than stuck in port as many thought? If sales continue, then maybe nothing. But even in this example of Reflation #3, what followed was a widely accepted “manufacturing recession” that peaked all too closely in a near total recession in early 2016.
If sales slow in 2022, more than they have, especially in real terms, that’s where the boost comes in. And this time stocks are, as noted, way more than anything which has been seen before, especially at retailers.
If that happened, the FOMC rate hikes would quickly prove totally unnecessary.
Editor’s note: The summary bullet points for this article were chosen by the Seeking Alpha editors.