The Global Economy Has An Inventory Problem

Carl reports on what he learned during his summer vacation.

It was nice to be away last week on my summer vacation. I finished three books, none of which had anything to do with economics. The hot policy debate I partook in centered on which bakery had the best cherry pie, a welcome departure from arguments over corporate tax reform. The waves I watched were cascading across the lake, not my Bloomberg terminal. It was a refreshing change of pace.

Of course, I couldn’t turn off my inner economist entirely. We were confronted with labor market issues almost everywhere we went: staff shortages were ubiquitous, with some attractions closed in the middle of the week for want of help. Most infuriating for me were the long lines at my favorite ice cream parlor, which was operating with a fraction of their normal summer team.

We also noticed shortages of a range of goods. Boats were in extended dry dock for want of parts. There were lots of shoppers about, but inventories of t-shirts and knickknacks were often thin. One proprietor told me that he had been waiting for months to receive a merchandise order that used to arrive within days.

US manufacturing inventory

As I connected these anecdotes with more formal reading upon my return, it became clear that the supply chains upon which economies rely are far from full health. As a result, inventories are being run down, and are proving difficult to replace. With China and southeast Asia struggling with the Delta variant of COVID-19, scarcity could get worse before it gets better. All of this could greatly complicate the outlook for growth and inflation.

Before I left, it was announced that the U.S. economy grew at an annualized rate of more than 6% in the second quarter. That is very strong…but fell far short of expectations. Forecasters had expected inventories to be replenished last quarter, but they fell sharply for the second quarter in a row. In some situations, firms will conserve on inventories to stay lean; but with demand booming, it seems more likely that frictions in production and logistics are at play.