Today, we learned that, in November, retail inventories rose more than 2%, the fastest pace since the 90’s, while imports jumped 4.7% and exports dropped 2%. Moreover, real consumption (including services) was flat and the saving rate dropped to 6.9%, below pre COVID levels.
As measured by the University of Michigan, which I believe is the best monthly survey on the consumer, sentiment during November and December dropped to a level last seen at the worst of the coronavirus crisis in 2020. In this context, the percent changes listed above make sense.
These percent changes are not annualized, so multiply them by 12 to understand the drama unfolding here in the US. Both businesses and consumers seem to have overreacted to supply chain bottlenecks by building “inventories” of goods while government stimulus was flowing freely.
These developments are not new. During the third quarter, real GDP was up a little more than 2% at an annual rate but real final sales - consumption, investment excluding inventories, government spending, net exports - were flat. That 2% growth was all in inventories.
This buildup, along with M&A and IPOs, reminds me of Y2K. This time the excesses are likely to be in industries that technology will disrupt: energy, financial services, and transportation among others. If so, this disruption will be the flip side of Y2K, completing the circle.
In our view, fears of inflation will give way to confusion and fears of recession during the next three to six months. If so, the rapid growth rates of truly innovative companies, many of their equities maligned this year, should be rewarded handsomely.
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