The Double Boom - Part 1: Inventories
While the shape of the recovery from Covid has been discussed at length, it is the shortages in inventories and housing that are going to drive potentially record levels of growth going forward. The Covid recession we are recovering from was ‘event driven’ not a business or credit recession (discussion of those two types of recession can be found here: https://www.wswealthmanagement.com/post/it-s-different-this-time). While we can argue over the ‘shape’ of the recovery, the Covid lockdowns only exacerbated the growing shortages in inventory and housing.
In February, as we were first beginning to deal with Covid, wholesale and business inventories were already low. The tariff war with China was the main driver for the shortage as many companies loaded up on inventories before the tariffs hit to avoid paying the tax and expecting a deal to be worked out eventually.
In the charts below we can see the ‘build’ going into early 2019, the ‘distribution’ taking place through 2019 and into early 2020, and now the ‘shortages’ created by the Covid pandemic response. This shortage is going to require inventory ‘rebuilding’ just to erase the deficit even before we can get back to normal inventory levels.
Rebuilding of inventories means increasing trade, manufacturing, and transportation (ship, rail, and trucking) – and that means jobs and growth. How much growth? A lot. Below is a graph of business inventories over the last 25 years showing business inventory growth significantly lower than in the 2000-2 and 2007-9 recessions.
While wholesale inventories have not been quite as negatively impacted as they were in the 2007-9 recession, at least not yet, they still show lower growth than the 2000-2 recession. Given the continued rate of limited economic activity forced by Covid, they may still go lower before increasing.
As stated earlier, rebuilding inventories takes a lot of transportation assets. Another way to 'see' shortages is to look at trucking and movement of truckloads. Currently, trucking is already 'tight' throughout most of the US. Dial-A-Truck (or DAT) operates a super-database that annually tracks 183 million loads needing transport and available trucks to carry them throughout the country, thereby actively matching loads and trucks. The chart shows that there are far more loads awaiting transport than trucks available. The chart uses the Load-to-Truck Ratio (L/T Ratio) or how many loads are waiting and how many trucks there are to carry them. Virtually every region of the country is at an L/T Ratio that far exceeds anything we've seen in the last 5 years.
Given the inventory drawdown and the tightness in freight hauling, the economic growth created by the upcoming inventory build should be very strong and could lead to some increased inflation pressures, we can expect to see increase in freight transportation costs at a minimum.
But, that is only half the story, in Part 2 we'll go into the housing shortage that we had been discussing last fall and how 6 months of pent up demand in purchases and building will increase the demand for construction materials, workers, and durable goods. This will add another level to growth we haven't seen in quite a while, maybe since the end of World War II as the Millennials take over from the Baby Boomers..