The latest figures on consumption, production, and inventories continue to show that the U.S. economy is rapidly exiting the coronavirus crisis—in contrast to last week’s disappointing payroll data. The main danger implied by the most recent numbers from the Census Bureau and the Federal Reserve is that bottlenecks in specific sectors—particularly the squeeze in microprocessors that’s straining the motor vehicle supply chain—could lead to price spikes or product shortages in corners of the economy.
Start by looking at how much Americans spent at retailers, bars, and restaurants in April. Despite no new “economic impact payments” from the Treasury, spending hit an all-time high thanks to spikes in demand for motor vehicles, electronics, appliances, and restaurants. Other sectors were flat or down slightly, but largely kept up the pace established in March. Total spending remains about 16% higher than at the end of last year, and 18% higher than before the pandemic. Excluding groceries and gasoline, retail and food service spending is about 20% higher than before the pandemic. Put together, the numbers were so strong that
upgraded its forecast for Q2 GDP growth by a full percentage point at a yearly rate.
With America’s vaccination rate continuing to rise rapidly, spending at food services and drinking places in April was just 2% below the prepandemic peak on a seasonally adjusted basis. Hiring in the sector has yet to catch up with consumer demand, which could mean that millions of job gains could be coming in the coming months. Moreover, the modest pace of price increases in the sector further implies that there have been substantial productivity gains since the pandemic began.
There’s more good news in the industrial production data. With February’s “deep freeze” in the rearview mirror, manufacturing output excluding motor vehicles and parts hit its highest level since the pandemic began, and is now less than 1% below prepandemic levels. Cyclically sensitive machinery output has hit its highest level since early 2019, while pharmaceutical manufacturing has hit its highest level since early 2012.
The main thing to watch in the latest data is the impact of the shortage of microprocessors. That’s why the surge in demand for motor vehicle parts isn’t being matched by rising production. Instead, demand is being satisfied through falling dealer inventories even as manufacturers are stuck with rapidly rising volumes of unsold parts and chassis. The value of motor vehicle and parts dealers’ inventories fell by 9% between December and March, the latest month for which we have data, while manufacturers’ inventories rose by 8%.
As of March, the ratio of auto dealers’ inventories to sales was at an all-time low of just 1.3, compared to 1.6 at the beginning of 2021 and a long-term prepandemic average of about 2.0.
Since retail demand increased in April while production fell, the strain on inventories can only have gotten worse since then.
Sooner or later, something will have to give, likely leading to higher prices on new vehicles to help cover the rising cost of microprocessors and moderate consumption, as well as slowdowns in delivery times and reduced selections for consumers. That hasn’t happened yet, but if it does, it shouldn’t be understood as a harbinger for shortages or inflation in the rest of the economy.
Write to Matthew C. Klein at email@example.com