Personal consumption of goods has stayed strong through the end of last year and into the start of 2023, but container shipping has fallen off sharply, although there was a slight recovery in January. Between shipping and consumption lie inventories, the goods stocked in warehouses and storerooms before hitting the shelves. How did wholesalers and retailers adjust inventories during the pandemic and where do their respective inventories stand?

The short answer to the first of those two questions appears to be: roughly in lockstep, until the middle of last year when the two began to diverge. From then on, wholesale inventories continued expanding, while retail inventories (ex-autos) appear to start coming down, albeit with a slight uptick in December. The spread between the two ended 2022 the widest it’s been in three years. Both remain well above their pre-pandemic levels, however.

This can be seen in the chart below, which compares retail and wholesale inventories with personal consumption expenditures on goods, all seasonally adjusted and deflated with the PCE goods deflator. While inventory-sales ratios are a popular measure, we opt for levels instead because, after all, barring lots of new warehouse space, it is the levels that will determine how quickly space is exhausted.

Looking back at early 2020, as most everywhere else, wholesalers and retailers were unprepared for the pandemic. Retailers, in aggregate, managed to cope for a few months longer than wholesalers, likely because of the post-holiday lull in sales. Once the pandemic hit in full, and the lockdowns began, their inventories shrank almost in tandem from May through July. By October, retail inventories had been re-built, insofar as we take 2019 as the measuring stick.

It took wholesalers until the following May to reach that level.

At least three factors contributed here, each relevant then, throughout the rest of the pandemic and still now. One was the shift in personal consumption towards goods (the dashed line in the chart). In 2020, consumer demand for goods rose by 10% year-on-year; in 2021 by another 18.5%. It had been trending in the other direction, away from goods towards services. But then a large portion of the population found themselves stuck at home, flush with disposable income and eager to spend.

The other two factors are intertwined, but with a collective impact on inventories that is tricky to measure in the context of a pandemic: one, more imports were needed to meet demand and, two, supply chains were disrupted. Imported goods, for all their benefits, do require more planning from firms around future demand because of longer lead times; real imports were up 9.7% in December 2021 over the previous year. Research has shown that firms that rely on imports tend to hold higher inventories. Add concerns about the stability of supply chains and the prospect of even longer-than-usual delays into the equation and the risk of getting caught with excess inventories rises.

In 2022, the U.S. and many other countries around the world emerged from the pandemic. Goods consumption in the U.S. remained stable, more or less unchanged from the elevated level it increased to in 2021. On an annual basis, goods imports were up again (+6.4%), but they were frontloaded in the first half of the year. In the second half, we saw the sharp downturn referenced at the outset – twenty-foot equivalent units (TEUs) fell -10.1% month-on-month in September alone and ended the year down -21.2% from August.

Preliminary monthly data for January 2023, the latest available, shows an inflation-adjusted month-on-month decline in retail inventories, excluding automotives, of -0.2% for December to January, following a -0.3% decline from November to December. The wholesale inventories data is somewhat mixed – nondurables shrank -1.2% in December and by the same amount again in January, but durables were up 0.2% in December and down -0.5% in January.

We may start seeing clearer, more aligned trends in imports, inventories and consumption in the coming months, particularly as we look closer at disaggregated levels. Yet, only time will tell whether the current state we’re in with inventories is just a temporary phenomenon or the beginnings of a new normal. Or something else entirely.

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