Economy-crushing inventory cycles are nothing new. 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 1920-1921 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 1973-1975 recession, the deepest since the 1930s.
I’m not forecasting a 2022 recession—yet—but excessive inventories are a warning. Huge inventory build-ups that precipitated gigantic cuts in production resulted in the serious recession after World War I and in the early 1970s.
This article was provided by Bloomberg News.