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Flagging US consumer demand puts economy on track for slowdown


As we have all become supply chain experts over the past year, more of us have become familiar with the dread “bullwhip effect”, when shortages of goods unexpectedly turn into surpluses. Well, it seems the bullwhip has cracked, at least for many US retailers.

Having spent months making excuses about stock shortages to American consumers, they are now trying to lure them back into the store or on to the website with promises of extended sales, discounts and faster deliveries. But it seems the buying public are no longer so interested.

So goods such as furniture, appliances and building materials, once impossible to find, are piling up in warehouses and stores.

Some evidence of this came with the Chicago ISM, a midwest business barometer often seen as a leading indicator of economic activity nationally. Its inventories index rose 8.5 points last month to 59.6, which was the highest since the US autumn in 2018. Order backlogs for manufacturers in the area dropped 18.8 points to 60.8, which is 6 points below the 12-month average.

Likewise, the IHS Markit Purchasing Managers Index for the US manufacturing sector for November this week pointed to increased inventory building. It said this often reflected concerns over the future supply situation.

This supply chain un-jamming seems to set the world’s largest consumer economy on track for a slowdown in the first quarter of next year as inventories are wound down, reducing new orders. An excess of finished goods might also lead to consequent weak pricing, moderating the current inflation panic. For once, it seems, a Federal Reserve forecast — that high inflation was transitory — could have been correct.

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I have been following the reports of economist Susan Sterne on the US consumer for decades, and I do not think anyone can match her obsessive-compulsive detail on buying trends, inventory levels, sentiment indicators and labour force dynamics. Policymakers I know would agree.

According to Sterne, at the retail level “this appears to be more a shortage of demand than supply, which is consistent with what the consumer says about current buying conditions”. Consumers, she says, are in a bad mood and do not, for the most part, think this is a good time to buy things.

This sentiment, Sterne says, is actually a leading indicator because it is predictive of consumer spending. “I keep an eye on sale announcements on line and arriving in the mail, and every sale is being extended. Otherwise the retailers just won’t get the volume,” she says.

If they don’t get that volume, they are going to have a lot of stuff, especially durable goods such as appliances, still lying around come January. “I think they [retailers and wholesalers] overestimated what people will rush out to buy,” she says.

Nobody wants to spoil the holiday mood, or the optimistic assumption that there was one in the first place.

But what about all the money the public has in bank accounts or high-priced securities? According to Sterne, “the only ones who have the savings are upper income people, and they can choose not to spend now. Consumer debt levels are quite high. That is particularly the case for young people — there was a substantial increase in borrowing for that age group.”

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There have been headline increases in pay for hourly workers such as those in Amazon warehouses or Walmart stores. But the inflation that came with the recovery has eaten through most of those raises.

And the extra money flows from government payments to middle and lower income people have dried up in recent months. Having reached a peak of close to $500bn in March, those were down to just above $200bn by October.

Democrats in Congress and the Biden administration had hoped to include some fat transfer payment programmes in the Build Back Better package now straining through Congress. Those are being trimmed back in negotiations now. Whatever comes out might be further cut by a future Republican Congress.

The public also knows tax increases are coming, and not just for billionaires. Payments on government sponsored student loans, a substantial burden on young consumers, were deferred at the beginning of the pandemic. That deferral expires in February, and no extension of the deadline is planned.

To me, this all suggests that it will not take much in the way of interest rate or energy price increases to restrain any “animal spirits” among the general public. And there will be some deep discounts in stores next month.



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