January 31, 2022

A bullwhip effect may be coming to the U.S. economy. I’m talking about the full Indiana Jones whip crack treatment.

In economic terms, that means distorted demand misinforms the supply chain, turning shortages into surpluses and “out of stock” into inventory reduction sales. If true, there may be post-Christmas sales from stores with overloaded inventories that will make Black Friday and Cyber Monday look like sidewalk sales. That would almost certainly make all the inflation talk disappear.

Overheated demand has been a big factor in this situation. Everybody wants to buy everything because they couldn’t go out, so consumer goods demand is sky high. Too many people wanting things has resulted in shortages. Then global supply chain gluts slowed things down. Combine all that with stimulus cash and we have a recipe for inflation.

The global supply chain is something we take for granted until it stops working. A shortage doesn’t mean something isn’t available at all. It just means there’s more demand than supply, and it may be available for a higher price.

What’s more powerful though is reversion to the mean. For every strong reaction, things eventually swing back the other way, then find their way to the middle again.

And that could be what we’re about to see – the pendulum swinging back hard. Efforts to repair weak links in the global supply chain and unlock bottlenecks are working. Also, Ford, GM, and others have indicated they expect semiconductor supplies to increase.

This could create a bullwhip effect.

It’s the supply chain equivalent of your brain not getting the message from your stomach that you’ve had enough to eat. So, you keep eating until the message finally reaches your head. By then you have a bellyache. We all know what that’s like. It may happen economically too.