Retailers are gearing up for 'aggressive discounting' on electronics, cars, and more as they've stockpiled the most stuff to sell in 30 years, Morgan Stanley says

• With demand cooling off and supply still growing, companies are looking to discount, Morgan Stanley said.
• The median inventory-to-sales ratio is the highest since 1990, and even higher among durable goods firms.

The perfect storm that's pushed prices sharply higher for more than a year is finally moving in American shoppers' favor.

Inflation is a product of two ingredients: strong demand and insufficient supply. For much of the pandemic recovery, the US featured both, as consumers enjoyed big pandemic-era stimulus payments that pushed demand higher and businesses struggled to reorganize supply chains in the age of Covid. That powered prices higher at the fastest pace since the 1980s.

Yet that supply-demand equation works in the other direction, and that should give households one more thing to celebrate this holiday season. Supply chain snags are clearing at the same time that demand is slowing, Morgan Stanley economists led by Ellen Zentner said in a Monday note to clients.

The shift is poised to create a historic supply glut throughout the US. The inventory-to-sales ratio for the median US company, which compares the value of unsold inventory to the value of sales over a certain period, has been climbing since the 2008 financial crisis, and while the measure dipped through much of the pandemic recovery, it's now at the highest level since 1990. In industries that produce durable goods like vehicles, electronics, and appliances, the mismatch is even bigger.

Companies don't like sitting on such large inventory piles, as holding stuff in stores and warehouses costs money and they don't get paid until it's sold off. As such, firms are set to slash prices through the last months of 2022 and into early 2023, Morgan Stanley said.

"We believe many will turn to aggressive discounting to solve their inventory problem which is likely to spark a 'race to the bottom' as companies attempt to cut prices faster than peers and move out as much inventory as possible," the team said.

That's a huge relief for Americans at just the right time. The holiday shopping trend is already underway, with Amazon, Target, and Walmart having started their discounting events earlier than usual in hopes of kickstarting a longer spending spree. The promotions offer some reprieve for customers slammed by high inflation, but as the holidays creep closer, discounting will likely be even more widespread.

Discounts are also expected to be larger than usual. Price cuts could hit record highs of 32% on some items, with electronics, toys, and computers seeing the biggest discounts, Adobe Analytics said in its latest forecast of holiday season sales. The firm collected data from roughly 1 trillion retail transactions and forecasted that the biggest discounts will hit between Thanksgiving and Cyber Monday. Still, bargains will first emerge in the second week of October and last through the rest of 2022, according to the report.

Morgan Stanley's analysts think the discount bonanza could extend well into next year. Inventory growth was still accelerating through the third quarter, and the supply-demand balance won't fully normalize until the first half of 2023, according to the team.

Businesses enjoyed once-in-a-generation pricing power through the pandemic recovery as extraordinary demand and supply-chain bottlenecks dragged inventories to extreme lows. The market is now whipsawing, and as Americans kick off their holiday shopping, they'll be spending significantly less on some items than they did just last year.