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Economic Re-acceleration Coming?

The current level of pent-up demand in the US economy is one rarely if ever seen. The US entered 2020 with a drawn down in inventories after the 'trade war' with China clearing the inventory levels from the late 2018/early 2019 buildup. The shutdowns of production in 2020 and into 2021 due to Covid hampered global supply chains and made inventory restocking difficult and often focused on 'essentials'.

We are now at extremely low inventory levels (chart 1) and earnings reports have shown difficulty in restocking as suppliers, when they can get the materials needed, are still having difficulty getting the workers and transportation to make and move products.

At the same time, US consumers are flush with money. After nearly 2 years of decreased buying, going out to eat, taking vacations, etc., the household debt to income ratio (chart 2) remains near lows and US savings deposits are estimated to have climbed $1.5T since the start of the pandemic.

While retail inventory to sales ratios are extremely low and US households in very good financial shape, inventories for 'big ticket' items are also very low - home and vehicle inventories are among their lowest on record. Homebuilding of all types (including remodeling) and automobile manufacturing (and everything associated with them) together have historically run between 20-22% of US GDP. From 2009-2019 homebuilding (chart 4) was only running at about 14% of GDP when it historically ran 16-18%.

We built homes at low to extremely low rates for a decade which means we are left with a historically low inventory of homes for sale (chart5).

Spring, usually the kickoff to the homebuying and moving season is only a couple of months away and we have an inventory to sales ratio, measured in month's supply, at all-time lows (chart 6).

This is highly likely to lead to increased home building, and new homes need new appliances, furniture, tools, etc. That could further exacerbate the low retail inventory levels and should lead to more production globally.

Automobile production has decreased in the US for almost 2 decades as imports gained further appeal and reliability and technology have made cars last longer (chart 7). Automobile production has stayed to historic cyclical patterns, unlike home building, but more recently has suffered from a computer chip shortage that could even lead to further shutdowns.

Given the demand for new cars, manufacturing should accelerate if the chip shortage is resolved as the inventory to sales ratio for autos is also extremely low (chart 8). While modern technology has allowed most business to 'run leaner' on an inventory basis, the current vehicle inventory to sales ratio is well below that trend.

US Q4 GDP rose a surprising 5.7% and the largest single contributor was the increase in automobile inventories. Given the incredibly low inventory to sales ratio in autos as well as the strong financial level of US consumers, there is a great deal of room for growth in auto manufacturing and inventories for the foreseeable future.

We enter 2022 with the consumer in exceptionally good financial shape after two years of some 'forced' savings. This has created pent up demand with not only retail inventories low, but inventories for big ticket items low as well. This is going to lead to an increase in home manufacturing and production and generate more jobs and more growth.

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