COVID-19 saw the shut down of the global economy. Even after reopening, much of the world is finding that the supply chain disruption was massive. There are shortages in all kinds of products, from any different industries.
After such a shock to the economic system, it is obvious that things would be out of kilter. The shutdown forced the stalling of production. What is interesting is that, in the Internet Era, purchasing could continue.
Of course, being locked down meant that most services were out the window. Hence, people started shopping for goods, especially durable. This was see by the home improvement projects where people brought appliances, televisions, furniture, flooring, as well as a host of other products. This led to the rapid reduction in inventory.
With inventories dwindling and suppliers shut down, anyone want to venture what is going to happen? To start, prices go up. When there is demand yet little supply, sellers take advantage of that. The second thing that crops up is long delays. This is what we also witnessed.
It is a situation that is still ongoing. However, there are some signs that some things could be changing.
What happens when suppliers fall behind with excessive demand out there?
Naturally, they ramp up production. They are intent on capturing every sale they can that they push things into overdrive.
This is rewarded in this situation since those in the middle, retailers, do not want to be stuck in the same situation. Hence, if the need one of something, they are going to order three of them. They are intent on making sure they are not in the same situation.
We see the situation compounded for manufacturers. This is across a few different industries and shows how hard things can be to forecast properly. It is also a sign the economy might reverse course in the next few months.
We can take a look at the automobile manufacturing business. We know this is on fire. Cars are in short supply even pushing up the price of used vehicles. At the same time, a company like General Motors is pumping out all the vehicles they can.
One problem: they cannot deliver them.
The chip shortage is causing GM to produce vehicles they simply have to park.
Here is the production that is just sitting:
Big SUVs (Arlington, Tx) 10,579
Mid-Size Pickups (Missouri) 9,275
Vans (Missouri) 5,800
Assorted (Michigan) 15,000
All of these are awaiting parts, mostly chips. The problem is that production still carries on. In Texas, 1,000 Big SUVs are produced a day, pushing the number higher unless the supply chain picks up.
When the economy reopened, due to the ongoing run in housing, lumber was found to be in short supply. Saw mills started to cut back at the end of 2019, before COVID even hit. However, the shutdown only caused further shortages.
Couple this with a disease in Canada that took out a lot of forestry as well as ongoing tariffs and we had volatile situation. When that happens prices move. In the case of lumber, it went up big time.
As we can see the price shot up. Sure, markets can get exuberant and overshoot, which was the case here. However, the general trend is what we look at. When the mills started to churn out more lumber and yards were filling up, then the futures market did a reversal. In fact, we could call it an outright crash in prices.
We are also starting to see this at the retail end. While it is not across the board, some prices are dropping. For example, pressure treated 2x4s are now about the same price as the regular ones. Why is that? The suppliers have excess of that. We are seeing a similar situation with plywood. What was $70 a sheet is now going under $20 and might head to $10.
The other day I asked in a video if lumber is a leading indicator for real estate? Without going into that, we know the supply/demand equation is flipping.
People think downwards pressure on prices is a good thing. After all, economists tell us lower prices will increase demand. This is not the case if the demand already peaked. When that happens, downward pressure is due to supply issues meaning that sellers are cutting their prices. Depending upon the industry, this means selling inventory for less than they paid for it.
Many are theorizing that the shutdown caused demand to be pulled forward by at least a couple of years. Hence, the economy was not really strengthened, it just moved things up. This is a combination of stimulus money along with people being cooped up at home. Without the ability to travel around, even locally, people had to do things at home.
Often times, price increases are a result of nothing more than a supply issue. We saw this across the global economy as every industry was impacted. Now things are starting to reverse course. However, are people taking this into account.
Once the demand is sated, then what happens? If some industries are already facing overstock conditions and having to slash prices, what does that mean for the overall health of that sector? As profit margins are squeezed, companies take steps to alleviate that. Mostly, this means cancelling any plans of expansion as well as contraction of employees.
This is the problem facing the economy right now. Over production is already becoming an issue. We are seeing the same in jet fuel as production outpaces demand. If this spread across many different industries, the shelves will find themselves full without an equal amount of buyers to take those products. Then we will see orders cancelled and companies like General Motors might find the vehicles parked on those lots, but for a different reason.
It is something we are going to have to keep an eye on as we head towards the end of the year.
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