You Can't Buy What They Don't Have to Sell

Nearly two years into the pandemic, our country continues to confront production and sourcing challenges that are leaving, at least episodically, any number of small-ticket items (think toilet paper) and big-ticket items (think new cars) in short supply. Those supply chain challenges along with a US consumer that is, on balance, flush with cash and focused on spending on goods rather than services (as the services side of the economy remains encumbered by the pandemic), have helped drive inflation sharply higher, as evidenced by the 7% jump in December’s Consumer Price Index—the greatest in nearly 40 years.

Regardless of how one thinks about or analyzes the economy, if one associates with the Keynesian school of economics or the Monetarist school of economics or another school, or none at all, most economy watchers would agree, we think, that we have a lot of money chasing too few goods. One indicator of a lot of demand and not a lot of stuff is November’s Total Business Inventories to Sales Ratio, coming in marginally above its all-time low (see chart).

At some point, and history tells us this always happens—and we are confident it will—supply will catch up with demand, which should moderate the gains in the prices of goods specifically, and inflation more broadly. And considering we prefer to take an optimistic view of things—and history tells us we should— there is an upside to limited inventories in the face of strong demand. That is production levels should continue to run at a high rate, supporting employment and corporate earnings, as well as ongoing investment in capital equipment; and as inventories are at modest levels, were demand to moderate it is unlikely companies would have to respond with steep cuts in jobs and investment, a dynamic that should help keep any economic slowdown from turning into a recession.

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