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Investment Commentary

Too Much Stuff!

By Kelsey Ellsworth | Johnson Financial Group • June 30, 2022

4 minute read time

Last year, I moved into a new house. At the time, finding in-stock and ready-to-ship furnishings was almost impossible. Discounts were out of the question. Supply chain disruptions were rampant, and we were paying close attention to data such as port backlogs and freight prices. Fast forward to this summer, and the landscape has changed. Now my email inbox is filled with discounts galore—rugs, patio furniture, and grills. If only I waited. With real incomes squeezed, the consumer is becoming picky on where to spend. We are seeing goods demand weakening and inventory levels climbing—a reversal over what has been seen since the pandemic began. That sounds like a negative, but there’s also a positive aspect: declining demand for goods is also a means to declines in inflation.

Consumer spending & inflation

In our recent Mid-Year Economic and Market Outlook, we described our view on inflation as we begin to see signals of peaking. The fiscal stimulus tailwind that helped boost personal income and spending has started to fade as consumer spending has begun to decline. Retail stores are beginning to feel the effects of this waning consumer spending. Furthermore, corporate earnings are expected to feel the pressures of decreased consumer spending as inventories rise.

corporate earnings are expected to feel the pressures of decreased consumer spending as inventories rise.

For consumers, there’s been a welcome easing of shortages in retail sectors that had the largest shortages early in the pandemic. For companies, however, increased inventory has begun to create problems. Recently, Bed Bath and Beyond replaced its CEO as sales plunged in the first quarter due to a mismatch between what the stores are carrying versus what consumers want. FedEx stated recently that package volumes have fallen while fuel costs have risen. Nike reported a 23% increase in inventories in the past quarter as compared to a year ago.

Some of the inventory buildup is attributable to companies stocking up because of the shortages we saw last year, so it’s not all the “Bed Bath and Beyond problem” of consumer preferences. The real retail trade inventories index lags about a month and a half, but the advance reading for May suggests continued increases in inventory levels. Trucking demand and freight have also declined significantly from peak levels. The S&P Global US Manufacturing PMI is also showing a dramatic drop in order backlogs and faster supplier deliveries. These improvements point to slowing inflation in the latter half of the year.

The S&P Global US Manufacturing PMI is also showing a dramatic drop in order backlogs and faster supplier deliveries. These improvements point to slowing inflation in the latter half of the year.

Weakening consumer confidence

Inflation may be peaking, but at the same time, the consumer-confidence index is edging down. June’s reading was weaker than expected at 98.7, down 4.5 points from May’s reading at 103.2. On the services side, restaurant foot traffic continues to be strong, but we are seeing a slight declines in consumers’ vacation plans by car due to record high retail gas prices.

Employment remains strong, but there are hints of increasing layoffs. Consumers have healthy balance sheets as debt is down sharply from 2007, but net worth and excess savings are declining.

With earnings season just around the corner, we will see how excess inventories affect companies’ bottom line and will gain greater insight into how consumers are choosing to spend their money.

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