Plunge of Retail Inventories, Collapse of New & Used Vehicle Inventories: The Shortages Depicted in Charts

Stock levels at retailers are evidence of this mess.

By Wolf Richter for WOLF STREET.

It turns out that if the U.S. government spends $ 5 trillion in borrowed fiscal stimulus over 16 months and the Fed spends $ 4 trillion in monetary stimulus over the same period, this creates a boom in asset prices The demand for goods is driving the country in tsunami-like waves and supply chains that meander around the world tangle in the midst of sophisticated just-in-time inventory strategies. And as retail sales soared historically, there were bottlenecks of all kinds, including the semiconductor shortage that has hit the auto industry with a vengeance.

Stock levels at retailers are evidence of this mess. Inventories are tight everywhere, but car dealerships, which made up more than a third of total retail inventory prior to the pandemic, are in dire straits.

Inventories at new car dealers, used car dealers, and parts dealers fell to $ 153 billion in May, 36% less than in May 2019, according to data released Friday by the Census Bureau. And the inventory-to-sales ratio – with inventories and sales in dollars canceling the effects of inflation – fell to 1.14, the lowest level in 1992 data:

The inventory-to-sales ratio (inventory divided by sales) is a standard retail measure. A ratio of 1 means that the retailer has enough goods in stock for one month of sales at the current sales price. This would be a 30 day supply. A ratio of 2 – i.e. 60 days supply – is considered healthy in the automotive industry.

Expressed in dollars: The vehicles in the warehouse, which have become more and more expensive over the years, explain the long-term increase in inventories in the following graph. Retail sales – and with it inventory – have seen tremendous cyclical fluctuations up and down over the past 20 years and have gone nowhere. In 2019, new vehicle sales were just over 17 million vehicles sold at the 1999 and 2000 levels, followed by a decline in 2020 to the 1978 level.

In terms of sales, the industry has stagnated for two decades. In parallel with this stagnation, stocks were in units. What changed were the prices of the vehicles.

Dealers book vehicles at cost price (“invoice”) in the inventory, not at the sales price. But the MSRP gives us an indication of what happened to the dealership cost: the MSRP of the F-150 XLT, the best-selling truck in the US, increased 80% from model year 2000 ($ 19,410) to model year 2021 ($ 35,050) . And the US’s top-selling car, the Camry LE, rose 22% from $ 20,388 to $ 24,970 (the WOLF STREET Pickup Truck and Car Price Index) over the same period.

In addition, there has been a large-scale structural shift away from lower-cost cars to more expensive SUVs and trucks, which further increased the dollars tied up in inventory without adding to inventory.

Given this increase in unit cost, let’s look at long-term inventories in dollars. And this makes the 36% decline in total vehicle and part inventories from $ 240 billion in May 2019 to $ 153 billion in May 2021 even more brutal when moving to more expensive units during the reporting period:

Inventories also fell during the financial crisis, but this was accompanied by a collapse in vehicle sales that resulted in GM, Chrysler, and a number of component manufacturers filing for bankruptcy protection.

This time around, in March, April and May, stimulated by incentives, there was strong retail demand for vehicles, and it wasn’t until June, when stocks ran out and prices skyrocketed, that sales fell sharply, down 14% compared to June 2019. However, the current inventory data only relates to the end of May, which was the basis for the one offered for sale at the beginning of June.

Total stocks at all dealers, from car dealers to supermarkets, fell to a seasonally adjusted $ 598 billion in May, 9.8% less than May 2019, the third straight month of declines but still above the low in June last year. These stock levels in May and retail sales in May – which had declined compared to April – resulted in the second-lowest stock-to-sales ratio in data history since 1992, the lowest being in April:

The spikes in the graph above occurred when retail sales suddenly plummeted – after the Lehman bankruptcy and in March and April 2020.

Expressed in dollars, the increases in inventory prices over the years explain some of the long-term inventory increases in the graph below. Note that the decline in inventory over the past few months has come despite rampant cost (and price hikes) hikes as the stimulating retail boom emptied inventory:

Stocks without auto and parts dealers, in dollar terms, are back on an expansion course after hitting a new all-time high of $ 444 billion in May, showing how much new and used car inventories have plummeted while most other retailers have better control of their inventories with bottlenecks in some products and more than abundant supply in other products:

But increased cost of items in inventory covers some of the narrowness; and given the surge in retail sales compared to pre-pandemic years, the inventory-to-sales ratio, despite rising for the second straight month, remains near its all-time low. Note the long-term trend (green line) of two decades of lean inventory strategies and the shift to e-commerce with its inventory efficiency (centralized warehousing):

Stock levels in grocery and beverage stores, after the empty spring last year, have recovered overall, reaching a new record of $ 54.4 billion in May.

With sales at these stores about 15% higher than pre-pandemic, they pushed the inventory-to-sales ratio to 0.73, compared to the pre-pandemic multi-year average of 0.78. Grocery and beverage stores increase their dollar holdings overall, but turn them over even faster, which leads to sporadic and short-term shortages of some items here and there.

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