Manufacturers report too much inventory, retailers too little

ST. LOUIS – Inventory issues continue to impact the region, according to a survey by the St. Louis Federal Reserve.

Manufacturers say they have too much inventory. Retailers say they have too few.

The survey, which is released quarterly and covers an area from central Kentucky to Arkansas, traces the current misalignment to the early days of the COVID pandemic.

Nathan Jefferson, associate economist at the St. Louis Federal Reserve, said the spring 2020 shutdowns disrupted supply chains and changed consumer spending habits. Inventory declined, especially among companies that relied on just-in-time inventory management.

The just-in-time method delivers the goods when they are needed. It works when the flow of goods is steady, Jefferson wrote in an analysis of the survey, but “if flows are disrupted, businesses are left without necessary inventory.”

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To make sure they had enough stock, companies placed aggressive orders. Inventories rose rapidly, reaching the strongest monthly growth on record, 2.8%, in February.

But, Jefferson said, post-pandemic consumer demand grew even faster. As consumers bought durable goods from retailers, inventories dwindled. After retailers hit a record low of 1.1 months of stock on hand in mid-2021, they had 1.2 months of stock on hand in July 2022.

Before the pandemic, retailers typically had 1.3 to 1.5 months of inventory, Jefferson wrote.

Inflation has dampened consumer spending, however, and some retailers now have seasonal stock they ordered when demand was higher, he said. Rather than pay the cost of storing seasonal goods for a year, he said businesses are signaling they plan to sell them at a discount.

These discounts are expected to hurt retail businesses’ results, but Jefferson said there could also be a benefit.

Lower prices could help dampen inflation, he said.