I've read from various posts on this Reddit over the years that Germany lagged behind Allied forces in military industrial output during WWII. Britain produced more aircraft, Russia produced more of everything, and eventually the US would enter the fray. This is a three part question: Did Germany overestimate their capacity? Did they simply not anticipate the war being one of attrition? And, why did Germany invade when they did instead of continuing to build up their military?
Germany was rearming in secret prior to Hitler's rise to power, but once the NSDAP took over, the pace of rearmament increased dramatically. Germany did not plan to declare war on everybody of course, their goals were more specific than that.
These are the most notable German actions from 1936 until the outbreak of the war in 1939:
While the war broke out in September 1939, the earlier situation in Czechoslovakia could have broken out into a general European war. A war with the West was anticipated as a possibility, but was not preferred, because the Nazis were not aware that they were going to be so stunningly victorious over the French* and their territorial ambitions laid predominantly in the East.
To answer the questions more specifically:
Did Germany overestimate their capacity?
Not so much, but they did underestimate Soviet production capabilities in addition to their ability to raise reserves and new formations. The late war production capabilities of the Soviets, the British Commonwealth and the United States were vast, but such a war was not one they ideally planned.
Did they simply not anticipate the war being one of attrition?
While material superiority was a significant factor, the war as a whole was not one of attrition in the same sense that World War I was. But the reverse is true of your assumption - the Germans did anticipate an attritional war against the French and British*.
And, why did Germany invade when they did instead of continuing to build up their military?
The Germans invaded Poland because they were ready for it, although they were not ready to invade the Low Countries and France at that time. Whether or not the Germans believed that the West would back down is debatable (that's basically another question for another time), but in either case France and Britain in this period were rearming and holding out for several more years would squander Germany's early advantage in rearmament.
Specifically with respect to the Soviet Union, the choice of 1941 for the Invasion was not Hitler's first choice. Initially, he wanted to invade in 1940, but his Generals persuaded him that this would not be possible. The choice to strike quickly (as opposed to waiting even longer) was based on several factors; Britain was unable to move on Europe in this timeframe (it would only be a 1 front war if it could be done quickly), the USSR had demonstrated spectacular military disorganization in the Winter War of 1939-1940, defeating the USSR was thought to have a demoralizing effect on British Leadership, and the resources of the USSR were hoped to be captured and put to work in resolving the war with Britain** (while also fulfilling the longer term objective of capturing this area - this was the original foreign policy goal of the Reich). Delaying what the leadership felt was an inveitable war with the Soviet Union would mean not taking advantage of a weakness that was likely not permanent, and striking at them later means striking at them when they had recovered in part or whole.
( * ) In The Blitzkreig Legend by John T. Greenwood and Karl-Heinz Frieser, it is made quite apparent that the Germans were being surprised by their own level of success, and that the extremely rapid knockout blow dealt to France was not something they had assumed would occur going into the conflict. In Wages of Destruction by Adam Tooze, it is mentioned that the German concerns over ammunition production and long term planning for the war made it explicit that the Germans were were expecting a drawn out campaign more similar to the First World War than to what would eventually happen.
( * * ) In The Wages of Destruction, the core thesis of the book is as follows - the resources of the Soviet Union were seen as a necessary acquisition in order to deal with Britain and an eventual confrontation (whether cold or hot) with the United States, but that the same lack of resources that led them to attack also guaranteed their eventual loss against the Soviet Union. This conclusion - that loss was inevitable - may not be universally shared, but the argument as laid out is quite powerful.
u/Tiddums answer is great.
I just came to add that Germany's economy in 1938/9 was running deep in the 'red zone', credit was being raised by dubious means, weapons programs were running very hot, and resources were under extreme pressure. This helped create a sense of crisis, of 'now or never' among those aware of the situation, even though the military commanders wanted more time.
Of course, by 1939 Britain and France were also building up arms quickly, so the feeling among the Nazi leadership was very much that time was against them.
Tiddums answer, and other additions, are fantastic.
For my own addition, Germany also lagged behind both Britain and the United States (though not part of the question) in women in the workforce. The "Rosie the Riveter" in the US and similar movements in UK allowed them to tap their female population as replacement labor.
The Germans, however, still saw women as largely homemakers and were more resistant to allowing them to work in industrial labor. Thus, the UK had about four times as many women in the workforce as Germany (even though Germany had about 1.5x the population of the UK).
Further Reading:
[soe.unc.edu/hoh/file.php?id=ContextualEssay.pdf]