Chart of the Month | Supply Chain Woes as the Pandemic Recedes in the U.S.

July 8, 2021 |
2 minute read
|

Supply chain woes continue to wreak havoc for retailers who are grappling with a strong rebound in consumer spending. Average six-month spending on durable goods, spurred by over $5 trillion in government support programs, increased 33.4 percent at the end of May 2021 compared to the same period one year prior. This is the strongest year-over-year level of consumer spending growth since at least 1993.

As vaccination rates improve further and mobility restrictions drop, consumers are also eager to get back to their pre-pandemic lifestyles and will begin spending more on services, too. Services consumption, which typically represents 65 percent of personal expenditures versus 35 percent spent on goods, was up only 4.2 percent in May versus the six-month rolling average of the prior year. Real GDP growth is expected to hit 13.0 percent in the second quarter of 2021 on a year-over-year basis and 7.2 percent at the end of the year, the fastest annual pace since the economy surged out of the deep recession of 1981-1982.

On the other hand, COVID-19-related issues continue to cause headaches for retailers who see backlogs in deliveries, materials supply shortages, and very expensive shipping rates, with little clarity on when the supply chain will catch up with market demand. In the services sectors, the labor market remains tight with restaurants and other businesses struggling to hire the necessary staff.

As a result of the unprecedented level of consumer spending, the ratio of current retail inventories to sales reached its lowest level since 1993. While it has been declining gradually over the last 20 years due to just-in-time inventory management, and typically declines during recessions such as in 2002 and 2008-2009, the ratio fell precipitously over the last twelve months. When done well, just-in-time manufacturing and inventory management can provide many benefits and savings to workers, owners and customers. It is a provisioning system that produces and delivers to consumers exactly what is needed, when it is needed and at the right price. However, the strategy has proven inefficient during the COVID-19 pandemic as both manufacturing and the global transportation network came to a halt.

Consequently, inflation pressures have picked up meaningfully in recent months, although much of the year-over-year increases are distorted by the base effects of comparing the current levels to the weak inflation prints during the pandemic. Whether the recent increase in inflation will be temporary or sustained is one of the key debates among market participants and politicians. At Commonfund, we believe that a substantial part of the overshoot in inflation is directly linked to the reopening of the economy and is likely to trend lower in the next two years. However, we do acknowledge that a steady pickup in wage inflation, particularly in the lower-income cohorts of the population which spends a higher proportion of income, could continue to support consumption and stoke inflation, if supply fails to catch up to demand.

Chart of the Month - July 2021

 
Ivo C. Nenin

Author

Ivo C. Nenin

Disclaimer

Certain information contained herein has been obtained from or is based on third-party sources and, although believed to be reliable, has not been independently verified. Such information is as of the date indicated, if indicated, may not be complete, is subject to change and has not necessarily been updated. No representation or warranty, express or implied, is or will be given by The Common Fund for Nonprofit Organizations, any of its affiliates or any of its or their affiliates, trustees, directors, officers, employees or advisers (collectively referred to herein as “Commonfund”) or any other person as to the accuracy or completeness of the information in any third-party materials. Accordingly, Commonfund shall not be liable for any direct, indirect or consequential loss or damage suffered by any person as a result of relying on any statement in, or omission from, such third-party materials, and any such liability is expressly disclaimed.

All rights to the trademarks, copyrights, logos and other intellectual property listed herein belong to their respective owners and the use of such logos hereof does not imply an affiliation with, or endorsement by, the owners of such trademarks, copyrights, logos and other intellectual property.

To the extent views presented forecast market activity, they may be based on many factors in addition to those explicitly stated herein. Forecasts of experts inevitably differ. Views attributed to third-parties are presented to demonstrate the existence of points of view, not as a basis for recommendations or as investment advice. Market and investment views of third-parties presented herein do not necessarily reflect the views of Commonfund, any manager retained by Commonfund to manage any investments for Commonfund (each, a “Manager”) or any fund managed by any Commonfund entity (each, a “Fund”). Accordingly, the views presented herein may not be relied upon as an indication of trading intent on behalf of Commonfund, any Manager or any Fund.

Statements concerning Commonfund’s views of possible future outcomes in any investment asset class or market, or of possible future economic developments, are not intended, and should not be construed, as forecasts or predictions of the future investment performance of any Fund. Such statements are also not intended as recommendations by any Commonfund entity or any Commonfund employee to the recipient of the presentation. It is Commonfund’s policy that investment recommendations to its clients must be based on the investment objectives and risk tolerances of each individual client. All market outlook and similar statements are based upon information reasonably available as of the date of this presentation (unless an earlier date is stated with regard to particular information), and reasonably believed to be accurate by Commonfund. Commonfund disclaims any responsibility to provide the recipient of this presentation with updated or corrected information or statements. Past performance is not indicative of future results. For more information please refer to Important Disclosures.

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Disclaimer

Certain information contained herein has been obtained from or is based on third-party sources and, although believed to be reliable, has not been independently verified. Such information is as of the date indicated, if indicated, may not be complete, is subject to change and has not necessarily been updated. No representation or warranty, express or implied, is or will be given by The Common Fund for Nonprofit Organizations, any of its affiliates or any of its or their affiliates, trustees, directors, officers, employees or advisers (collectively referred to herein as “Commonfund”) or any other person as to the accuracy or completeness of the information in any third-party materials. Accordingly, Commonfund shall not be liable for any direct, indirect or consequential loss or damage suffered by any person as a result of relying on any statement in, or omission from, such third-party materials, and any such liability is expressly disclaimed.

All rights to the trademarks, copyrights, logos and other intellectual property listed herein belong to their respective owners and the use of such logos hereof does not imply an affiliation with, or endorsement by, the owners of such trademarks, copyrights, logos and other intellectual property.

To the extent views presented forecast market activity, they may be based on many factors in addition to those explicitly stated herein. Forecasts of experts inevitably differ. Views attributed to third-parties are presented to demonstrate the existence of points of view, not as a basis for recommendations or as investment advice. Market and investment views of third-parties presented herein do not necessarily reflect the views of Commonfund, any manager retained by Commonfund to manage any investments for Commonfund (each, a “Manager”) or any fund managed by any Commonfund entity (each, a “Fund”). Accordingly, the views presented herein may not be relied upon as an indication of trading intent on behalf of Commonfund, any Manager or any Fund.

Statements concerning Commonfund’s views of possible future outcomes in any investment asset class or market, or of possible future economic developments, are not intended, and should not be construed, as forecasts or predictions of the future investment performance of any Fund. Such statements are also not intended as recommendations by any Commonfund entity or any Commonfund employee to the recipient of the presentation. It is Commonfund’s policy that investment recommendations to its clients must be based on the investment objectives and risk tolerances of each individual client. All market outlook and similar statements are based upon information reasonably available as of the date of this presentation (unless an earlier date is stated with regard to particular information), and reasonably believed to be accurate by Commonfund. Commonfund disclaims any responsibility to provide the recipient of this presentation with updated or corrected information or statements. Past performance is not indicative of future results. For more information please refer to Important Disclosures.