Warehouse Space Telling Us The Economy Is Going Down
While the Fed is looking at their unemployment metrics, those who look at the board scale numbers are getting an opposite viewpoint.
We are told how strong the economy is in spite of an awful first quarter in the United States. Nevertheless, the Fed is intent on raising interest rates because of the "inflation" problem.
While it is true that the CPI is off the charts, hitting 40 year highs, this is not a monetary phenomenon. It is not going to be sustained and we are already seeing major cracks. Remember, inflation numbers are backward looking indicators. They are not forward looking.
In other words, it told us what happened, not what is taking place.
So while we are dealing with the results of a global supply shock, things are starting to shift around.
And this does not bode well economically.
Demand Destruction
One of the ways the Fed is going to approach the problem with the pricing is to alter the equation. Naturally, there is only one way to do that.
Here is what Chairman Powell said when answering questions about the latest rate hikes:
Well. So our tools don’t really work on supply shocks. Our tools work on demand. And to the extent we can’t affect, really, oil prices or other commodity prices or food prices and things like that, so we can’t affect those. But there’s a job to do on demand. And that—you can see that in the labor market, where demand is substantially in excess of supply of workers. And you can see it in the product markets as well. Pg.11
In other words, Powell knows the only thing that it (The Fed) can do is destroy demand.
But what if it was already taking place?
There are a number of factors that lead to this conclusion.
Inventories Piling Up
For all the problems we hear about supply changes, the reality is the United State is flush with products. In fact, it is to the point where demand is waning to the point that everything is filling up.
We had the numbers from Walmart and Target reflecting that buyers purchasing habits were changing.
It appears that shoppers were passing up the higher margin, discretionary items for the lower priced good. This is not a positive sign for the economy.
However, this is only one phase of the equation. The other is the fact that inventories are piling up. We saw this in the data in the 4 quarter where 2 of the 3 months had record jumps. It now appears things just keep getting worse.
Does that look like we are having issues with supply chains? Certainly there are some things that are in shortage. However, when it comes to a lot of products, demand destruction was occurring for a while.
Of course, the Fed will pile on and help that along.
Warehouse Space Filling Up
We hear about how commercial real estate is suffering. While this is true for office and retail, industrial space is starting to be a premium.
The nation’s industrial real estate market continues to set marks for low vacancy rates and high rents despite a “flatline” of e-commerce growth as many Americans return to their pre-pandemic routines, according to commercial real estate firm Savills.
Those steep vacancy declines and rent spikes are driving record development of new warehouses and other facilities, the firm said in its “U.S. Industrial Market Update - Q1 2022.” Developers are currently building nearly 750 million square feet, up from the 507 million square feet they were creating in the same quarter last year.
During the pandemic, we saw a shift in buying habits. People were locked at home, meaning that services declined. Since money could not be spent on that, or travel, people started to buy products. This caused a massive rush of orders that manufacturers were not prepared for.
However, as noted, things are returning to their pre-pandemic ways. Stimulus money has dried up in many countries. Transfer payments were a large part of the "recovery" witnessed during the last year. That all stopped in the US at the beginning of January. Of course, this is the largest consumer market so it is worth watching.
What does record increases in inventory tell you?
The simple fact is that demand is not what is was advertised as. We are seeing buyers start to resist pulling out their wallets. This is going to filter through the economy. In fact, it already has.
We can expect more numbers like the ones from Target and Walmart if things do not change soon. This will only be compounded as companies start to lay off employees. Watch for manufacturing to start to take some hits.
None of this is very optimistic for the second half of the year.
And we can count on the Fed to only make it worse.
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