By Professor Ricardo Ulivi, Ph.D.
Just like a thermometer can be used to measure fever, can we use the trend in the prices of commodities to measure the healthiness of the current economic activity? Or, can we use current commodities prices as a predictor of future economic activity?
One could argue that, if commodities prices have dropped significantly compared to a few months ago, it means that demand for those goods has been reduced and, therefore, it’s a strong sign that overall economic activity is slowing down; the risk of a recession is great. On the other hand, it may well be that low commodities prices can set the stage for economic growth because their low cost encourages consumption. In other words, it’s not easy to figure out what is going on or what is likely to happen!
Let me show you what has happened to commodities prices over the last six months, and you draw your own conclusions as to what they imply about economic activity. Please ignore the unit of price; just focus on the price change.
- Gold was $1,300; now $1,241, down 4.5%
- Copper, no change
- Crude oil Brent was $106, now $85; down 25%
- Natural gas was $4.80, now $3.7; down 23%
- Wheat was $700, now 522, down 25%
- Corn $500 now $353, down 29%
- Soybeans $1,250 now $962, down 23%
- Rice $14,500 now $12,530 down 14%
- Live cattle $140 now $168 up 20%
- Cotton $83 now $63, down 24%
- Sugar $19.25 now $16.50 down 14%
- Cocoa was $3,000 now $3,113 up 37%
- Lumber, no change
- Ten year interest rate was 2.65% now 2.2%, down 17%
- Stock prices, up 2.5%
My bet is that this huge drop in commodities prices, quite generalized, means the world economy is slowing down and that should affect the stock prices, which have been up since April, in complete contrast to commodities prices.
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