In a Dec. 10, 2021 article from Crain's Cleveland Business, Gary Schilling writes, “The Bank for International Settlements warns that building precautionary stockpiles of components by some manufacturers might be exacerbating shortages. This creates a false picture of underlying demand.”
The author, Gary Schilling, cited Deere & Co., and its plans to accelerate production off the heels of the just-concluded 5-week strike, to meet robust demand and rebuild inventories (see Assn. of Equipment Manufacturers bullish report on December 10, 2021).
The article includes the following observations from history: “After World War I, price and wage controls were removed, and pent-up demand and prices exploded. Manufacturers double- and triple-ordered to beat further price increases and shortages. Retailers encouraged consumers to buy ahead in anticipation of further price jumps.
“Inflationary expectations fed on themselves and created a false sense of robust underlying demand. Prices leaped 24% from the first quarter of 1919 to the second quarter of 1920, according to George A. Gade's book, Hand-to-Mouth Buying and the Inventory Situation.
“In April 1920, however, the bubble broke, and prices dropped 42% to the second quarter of 1921 bottom. Falling prices revealed the false basis for demand, buying dried up and the massive production cuts to liquidate excess inventories resulted in the 1920-21 recession, the steepest on record. After that bloodbath, inventories were shunned and buying was hand to mouth — hence the title of Gade's book.
“In the early 1970s, inflation was raging due to huge excess demand created by massive federal outlays for the Vietnam War and Great Society programs. Once again, double- and triple-ordered inventories were delivered and production cuts to liquidate them fueled the 1973-75 recession, the deepest since the 1930s.”
While Schilling insists that he isn’t forecasting a recession (“not yet,” he says), excessive inventories are a warning. “Huge inventory buildups that precipitated gigantic cuts in production resulted in the serious recession after World War I and in the early 1970s.”