But the times got hard and tobacco wasn't selling*

For many, the most interesting question about inventory is probably why it's pronounced "IN·vuhn·tree" rather than "in-VEN-tree". Let's face it, inventory is not the kind of topic you can impose on your dinner guests. "Yes, we'll get back to Zack's tidbit about Justin Trudeau stalking Ariana Grande in a minute but, first...there's this update on durable goods turnover" is not generally recognised as the conversational power move of a great socialite.

Sadly, however, it is the kind of social faux pas to which I am habitually prone and, in consequence, I cannot think of anyone better to champion the cause of a hopeless underdog and plead for your closer attention to the US monthly inventories figures, published by the Department of Commerce via the Census Bureau, which have charted an interesting course over the past year.

First, let's briefly revisit the financial context in which inventory is more commonly discussed. The "Inventory Turnover Ratio" is a value which shows how many times a company has sold and replaced inventory during a given period. It can be calculated in a number of ways of which the most accessible is to take sales (cost of goods sold or COGS will give a more accurate measurement) for a given period and divide this by average inventory during the same time period. So, let's say that in my ghost-writing distribution business over a two week period I sell several "white label" blogposts for a total of $200. I also have a fluctuating number of blogposts in my inventory from authors-for-hire, with a collective average value of $50. In this case, my inventory turnover ratio for the fortnight is 4:1, correlatively my inventory/sales ratio is 1:4, and it takes me an average of 14/4 (or 3.5) days to turnover my inventory.

This ratio, which is high both when inventory is merely efficient and when it is hard to come by, presents a number of interpretive ambiguities but it should, at least, reveal over time whether the supply of raw materials, components or stock into the business can keep up with the demand for the goods it sells. Consequently, making the calculation can help businesses take better decisions on pricing and purchasing. It can also help investors compare the efficiency of companies and so make better long-term investment decisions.

The pandemic, as one might expect, has had a disruptive effect on these numbers for most retailers. In general, inventory turnover slowed at the end of Q1 2020. The obvious immediate exception was local grocery stores which saw a dramatic increase in turnover owing to panic buying of essentials and a positive shift in the habits of their customer-base.

Another set of inventory figures which saw a significant dip in 2020 were the monthly Retail and Wholesale Inventories figures published by the US Department of Commerce. These represent a broad estimate of aggregate goods held for sale in the two sectors. Retail inventories for May last year fell 6.1% month-on-month and were down 9.5% on the previous year. Wholesale inventories for May 2020 fell less dramatically but were still down by 1.2% month-on-month (and by 4.3% from 2019). Aggregate inventory figures are sometimes difficult to interpret. Inventories can fall either because stock is in demand, or because it isn't and consequently isn't being held for sale. In April/May 2020, the dip reflected retailers' response to lockdown and their expectation that non-essential items would be harder to sell.

For the remainder of 2020, retail inventories rose. This year, however, the figures have been falling again and it's not immediately clear why this should be so. A similar pattern is also reflected in total business inventories/sales data that the Census Bureau publishes. This ratio peaked dramatically at the end of Q1 2020 as non-essential sales fell but then fell and stablised and rose slightly for the remainder of the year as businesses managed their inventories down, in line with sales, before the figures started falling again in Q1 2021. The more recent drop (figures are only available to March) is unlikely to be in consequence of falling sales expectations, since all the talk has been of opening up the economy. It seems, rather, to be the upshot of disrupted supply lines, increased demand and tighter conditions in the commodities markets. If news reports last week are anything to go by, the April figures (available in June) may show a further decline in the national inventory-to-sales ratio, with increased post-pandemic sales combining with shortages of raw materials and manufacturing components to create upwards pressure on the ratio.

What is interesting is that bottlenecks and shortages that are often reported as isolated phenomena--semiconductor chips, copper, plastics, the Suez Canal, box ships at LA/Long Beach--are, in fact manifesting in the US inventory figures as a cross-sectoral trend. This means that what people may have tried to present as a series of commercial issues is, in fact, rapidly turning into an economic one. The origins of the phenomenon are complex but they likely involve two aspects of the pandemic: first and foremost, tighter conditions in freight markets where labour shortages and turnaround delays have taken their toll and, second, rapidly shifting patterns of consumer behaviour which now involve spending more time at home, often online.

These behaviour shifts have had some foreseeable consequences, such as increased demand for home laptops, and some less well-foreseen consequences, like a crypto-trading boom impacting car manufacturers via a semi-conductor chip shortage or a DIY boom contributing to a lumber shortage. Some manufactured products, in the middle of the supply chain, like electrical wire, have been squeezed on both sides: first, by a shortage of raw materials (copper and iron) and, then, by the shift in consumer behaviours. Electrical wire, for example, is simultaneously in demand by manufacturers, crypto-miners, online traders, gamers and DIY enthusiasts.

The outcomes that result from the supply shortages are likely to be just as complex as the causes but one question that will be preoccupying central banks is whether the combination of pent-up consumer demand, economic stimulus, investment in infrastructure (ie, construction) and low inventory stocks will drive inflation upwards as more money chases fewer goods. If so--and it seems likely--the next question is: how fast and for how long? That, of course, is anybody's guess.

One might as well ask: how long is a piece of electrical wire?

*You'll Never Leave Harlan Alive, Darrell Scott. Lyrics © Emi April Music Inc.