Rise in stocks in the United States and China

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Warehouses in China and the United States are full of unsold televisions, refrigerators and sofas, a common sign of divergent pandemic recoveries that could herald renewed pressure on global supply chains and upend product selection in American stores.

Goods accumulate for different reasons in each country.

In the United States, consumers are spending more on in-person experiences like dining out than on goods, as they did last year, a shift that has left retail inventories at an all-time high.

Chinese stocks are rising due to the government’s “zero-covid” policy, which has dented consumer spending in recent months while allowing many factories to continue producing. Finished goods inventories in April equaled more than 21 days of sales for the first time in at least 12 years, according to Capital Economics, a research consultancy.

The sale of these mountains of goods will shape the growth rates of the world’s two largest economies. Discounts needed to free up warehousing space on both sides of the Pacific could provide U.S. shoppers with bargains, though economists say any savings on leaf blowers and laptops won’t do much to help. reduce the inflation rate by 8.6%.

The stock tumult represents the latest chapter in the global economy’s stop-start performance since 2020.

“We really have a multi-speed global economy today,” said Gregory Daco, chief economist at Ernst & Young. “…There is a time lag and a demand lag between the goods available and the goods sold.”

China’s economy came to a virtual standstill this spring as China’s commercial capital Shanghai and its 26 million people went into lockdown, while the United States rebounded from a pessimistic first quarter as consumers rushed to resume their pre-pandemic lifestyle.

After more than two years of struggling to get enough goods into the country, many American businesses suddenly have too many of some items and not enough of others. The disconnect between overwhelmed warehouses and changing consumer tastes reflects the challenge facing many businesses as the economy twists in unpredictable ways.

Unease about the way forward on Monday sent the S&P 500 index, the broadest stock market indicator, into bearish territory, down more than 20% so far this year.

The stock piling comes even as chronic shipping grunts have subsided.

In April, US imports fell $13 billion from March levels, signifying less demand for space on container ships. Since May 1, the cost of shipping a standard container from China to the US West Coast has dropped 37%, according to the Freightos Index. On Friday, 20 freighters were waiting for a berth off the southern California coast, up from a record 109 in January.

Although there is little chance of a repeat of last year’s epic traffic jams, the recent improvement may prove fleeting. China eased its lockdown of Shanghai in early June, which could produce a “ketchup effect” as the clogged port suddenly releases ships bound for the United States, according to Windward, a supply chain data firm.

The Port of Los Angeles is also gearing up for an earlier than usual peak shipping season as U.S. retailers shift gears to match back-to-school and holiday orders with changing consumer tastes. fast.

“We expect congestion to increase again. We tell our customers. We’re preparing for that,” said Brian Bourke, chief growth officer for SEKO Logistics in Chicago.

The recent shutdowns have brought large parts of China’s economy to a virtual standstill. Tens of millions of Chinese consumers have been effectively trapped at home and local businesses have been shut down. However, many factories continued to operate with workers staying on site 24/7 to minimize the risk of infection.

As the economy reopens, Chinese buyers will begin to reduce stockpiled goods. But with the threat of further shutdowns creating uncertainty – Shanghai and Beijing have already seen further restrictions – consumer spending is expected to remain weak, said Mark Williams, chief Asia economist at Capital Economics.

This will increase the supply of consumer goods available to US customers, which will put downward pressure on export prices.

“The main impact of China’s weakness is that China is going to be a significant disinflation force for the rest of the world,” Williams said.

A glut of foreign-made products could already be contributing to lower prices for some products in the United States. Discount retailer Burlington Stores, which imports from Chinese and other suppliers, said the availability of low-cost goods has improved significantly.

“The situation has completely changed. Just a few months ago, many sellers lived hand to mouth. Their warehouses were empty and they were literally [operating] just in time, waiting for the goods to pass through the ports. Now, a few months later, the national warehouses are full,” said CEO Michael O’Sullivan. “And in many cases, they back off. … We were able to close some very good deals.

O’Sullivan said the increased supply could be due to other retailers ordering too much or under-ordering supply chain issues. It’s not yet clear whether China’s repeated long-term lockdowns will lead to product shortages or prompt suppliers to order defensively, which could lead to further oversupply, he said.

Overall, savings on discounted goods would likely be overwhelmed by price increases in other goods, including gasoline and rent, economists said.

After more than two years of chronic supply chain headaches, inventory management is now front and center for retailers and industrial companies.

Mark Mathews, vice president of research development for the National Retail Federation, said record inventories of $696 billion remain low relative to sales.

Still, some retailers, burned last year by problems getting goods through crowded West Coast ports, have placed unusually large orders this year. Inventory at Lands’ End rose by $52 million in the last quarter as the company rushed orders “because the supply chain has been so hectic,” chief financial officer Jim Gooch said during an interview. an earnings call this month.

Similarly, at Kirkland’s, which sells specialty home décor, first-quarter inventory soared to nearly $131 million, up more than 71% from a year earlier as executives imported in 90 days most of what they hoped to sell in the first half. the year.

The company has drawn on a $35 million emergency line of credit to fund the accelerated purchases. With inventory levels expected to continue to rise through August, Kirkland’s is cutting prices and canceling or delaying $50 million in orders for products such as furniture that don’t sell.

“This inventory situation caught a lot of us off guard,” CEO Steve Woodward told investors last month. “I think everyone is a little inflated on inventory and they don’t want to be.”

Indeed, Target is cutting prices on outdoor furniture and appliances to free up space in store aisles for travel-related products like luggage, while Walmart has lowered prices on more than 10,000 items, including including clothes.

Economy shows resilience despite growing fears of recession

But as US retailers rush to cancel orders for goods consumers no longer want, they’re struggling to figure out which products they should put on their shelves. Forecasters face the possibility of additional lockdowns in China, fallout from war in Ukraine, inflation at its highest level in 40 years and new navigation problems.

“The problem is that the economy is moving quite quickly,” said David Page, head of macro research at AXA Investment Managers in London. “The longer time between order and delivery means a greater chance that the economy will turn – and the economy will turn.”

Industrial giants are also feeling the pressure. Over the past year, manufacturers’ inventories have increased by nearly 11%, almost as much as retailer inventories.

The increase in industrial stocks stems from supply problems and not from changing tastes. In many cases, factories have most of the parts needed, but cannot continue production because a critical component is missing.

At tractor maker John Deere, for example, “work in progress” inventories soared to $1.6 billion from $967 million a year ago. This explains why outlets lack the Deere products they need.

The company expects to ship more product than usual over the next six months “as we work through a backlog of partially built inventory awaiting supply parts,” Deere Controller Rachel Bach told reporters. investors.

Similarly, Eaton, which makes industrial goods including electronic components and lighting systems, reported $783 million in semi-built goods, up nearly 50% from a year ago.

“If you’re missing a small component, you’ve got a bunch of people standing around in the factories, unable to complete the assemblies,” said Craig Arnold, Eaton’s chief executive. “That leads to some pretty significant inefficiencies in your operation.”

If there is a ray of hope in the swelling of industrial stocks, it is that they can cushion any recession. Partially completed construction equipment found on Deere lots, for example, will eventually be sold, once the missing parts appear.

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Post expires at 1:02pm on Sunday June 26th, 2022

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