Friday’s Retail Sales Were Supply-Chain Positive

#CKStrong

There was a lot of hang wringing over Friday’s retail sales coming in softer than expected.

U.S. retail sales stumbled at the end of 2021, factory output weakened and consumer sentiment deteriorated at the start of the new year, illustrating a loss of traction for the economy that many analysts view as temporary.

Friday’s data deluge showed how lingering shipping challenges, supply and labor constraints, the fastest inflation in decades and the omicron variant are weighing on activity. – Bloomberg

Slowing Sales A Necessary Conditions To Fix Inflation And The Supply Chain

Au contraire, we use the differential of U.S. retail sales versus its pre-COVID trend as a good proxy of what is driving much of the problem in the global supply chains — that is, excess demand.

Take a look at the chart (last chart) below and see how out of whack retail sales are and how far above they are above the pre-COVID trend, which is inflationary and unsustainable.

We use the differential of current level retail sales to its pre-COVID trend as a proxy of excess demand in global the economy, which is, fundamentally, inflationary. No doubt, there are real supply chain issues where factories close, say, due to sick workers from COVID, for example, but these are de minimis when compared to the massive gap between demand and supply.

Bullwhip Effect

The volatility and unstable point-of-sale demand create havoc on the clarity of producers and upstream suppliers for forecast future demand. . Research indicates such high volatility in point-of-sale demand of five percent will be interpreted by supply chain participants as a change in demand of up to forty percent.

In such an environment, it is not uncommon for suppliers to panic, double and triple ordering, hoard, or attempt to secure some inputs in the underground market. In other words, hyperinflationary expectations and panic, to some extent, and taken over and swamped the supply chain.

To Produce Or Not To Produce

Moreover, producers have to decide if the demand they do see is real and sustainable and then determine whether to expand capacity accordingly to meet that excess demand.

Our priors are that producers’ perceptions are that much of the demand has been generated by the stymie money pumped into the economy over the past 19 months and is more or less temporary and comes and expectation sales will eventually move back to trend. Producers have been burned many times in the past, reacting to sales that were not sustainable and getting stock with excess capacity.

Friday’s numbers confirmed, at least to us, that the initial stimulus is starting to wear off as the Fed prepares to reverse and begins to remove accommodation. Here’s to hoping they get the timing right.

No Pain-Free Way To Reduce Inflation

There is no pain-free way of ridding an economy of inflation. It’s difficult to measure how much the Fed needs to slam on the brakes, especially as the economy moves back to its natural glide path without trillions of income support and teeters over a fiscal cliff.

The Fiscal Cliff

Whatever, the case, the next year will be very interesting to watch how the economy and markets react to the Fed’s attempt to unwind its monetary experiment, which is unique and has never been attempted in a modern-day economy.

Finally, I think the pandemic will mark the point when economists stopped referring to supply curves and replaced the term with supply chains. About time.

Stay frosty, folks.