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Burlap Shows No Recession


While Alan Greenspan and the bond market see at least a 1-in-3 chance of a U.S. recession this year, commodity markets are showing no risk of that happening anytime soon.

Nickel and tin have jumped more than 18 percent this year, cattle hides are up 3.3 percent and burlap rallied to a record. The raw materials are part of the Journal of Commerce Industrial Commodity Price Index, a measure created by Greenspan's mentor and former professor Geoffrey Moore. The former Federal Reserve chairman uses it as a benchmark for the economy and inflation.

Commodity prices "are certainly sending a message that the economies are relatively healthy,'' said Anatol Feygin, head of global commodity strategy at Bank of America Corp. in New York. ``Specifically to industrial metals, it's clearly telling us the market is still very tight.''

Demand from China, the U.S. and India for steel, copper, oil and polyester drove the index 72 percent higher over the past five years to a record 135.9 this month. China's government is targeting growth of 8 percent in 2007, after expansion of 10.7 percent last year, the fastest pace since 1995.

Greenspan said in an interview on March 5 that there's a ``one-third probability'' of a U.S. recession this year. The Dow Jones Industrial Average that day reached its lowest since November. It has since rebounded 1.9 percent to 12,276.32.

Greenspan and Commodities
The industrial index accurately predicted past economic declines. It peaked in September of 2000, six months before the start of a U.S. recession, according to the National Bureau of Economic Research in Cambridge, Massachusetts. The indicator reached a high in October 1989, and its drop presaged a recession that started in July 1990, the bureau said.

Greenspan gained an interest in commodities at what is now the Conference Board, a New York-based business group, as an industrial-metals analyst from 1950 to 1953. While his job was to keep track of inventories, he also created a model for demand, which he expanded to include textiles, aluminum and oil.

Appointed to the Fed by President Ronald Reagan in 1987, Greenspan steered the U.S. economy through 10 straight years of growth starting in 1991, the longest streak in peacetime. The boom helped trigger a quadrupling of U.S. stocks from March 1990 to March 2000, based on the Standard & Poor's 500 Index. The 81- year-old economist left the central bank in January 2006.

Former Fed governor Wayne Angell, a Greenspan colleague for seven years, said he too watched commodities while setting interest-rate policy. He still monitors prices through a commodity index he created and shared with Greenspan.

'Looked at Everything'
"Alan Greenspan looked at everything as most monetary policy makers do,'' Angell said, declining to elaborate. Greenspan wouldn't comment for this story.

The Journal of Commerce index tracks 18 industrial materials... and reached 135.06 on Friday. Half of the commodities aren't traded on U.S. exchanges, which prevents price gyrations from speculative trading.

The index shows ``the economy is not falling off a cliff,'' said Lakshman Achuthan, managing director of the Economic Cycle Research Institute, the New York-based group that compiles data for the measure. ``The index is rising and could lead the production numbers by four or five months.''

Prices for some commodities are likely to keep rising. Demand for polyethylene used in plastics is growing faster than output, Nova Chemicals Corp. Chief Executive Officer Jeffrey Lipton said in an interview from Pittsburgh. Steel will rebound from a 17-month low next month as orders erode inventories, Mittal Steel USA Chief Executive Officer Louis Schorsch said in Chicago.

Skeptical Economists
The bond market is more bearish about the prospect for growth. The probability the U.S. economy will shrink for two quarters has risen to 50 percent, according to a model created by the Fed's Board of Governors when Greenspan ran the central bank. The formula is based on differences in yields on Treasuries.

Using commodities to forecast economic growth is risky today, says Jim Walker, chief economist at CLSA Asia-Pacific Markets in Hong Kong, who was voted best regional economist in the Asiamoney brokers survey in 2004 for the 11th straight year.

Prices "reflect liquidity and expectations more than real economic activity, and that makes them probably a less good predictor of real economic output than they used to be,'' Walker said in a March 7 telephone interview.

The amount invested in commodities worldwide rose to about $120 billion in 2006 from $5 billion in 1999, according to London-based Barclays Capital. Demand for raw materials from China and India may bolster commodity prices this year.

China's Goal
"When I look at Asia, I see very aggressive demand for base metals and commodities,'' said William O'Neill, a partner at Logic Advisors, a commodity research firm in Upper Saddle River, New Jersey.

The slide in global equities was spurred by Chinese government initiatives to limit speculation in its stock markets. Premier Wen Jiabao said March 5 the country will curb investment and lending to stop the economy from overheating. Demand is great enough to make China the biggest consumer of copper, iron ore and aluminum.

"Even if China grows 8 percent, that's a lot of growth,'' said Jim Rogers, the author of ``Hot Commodities'' who predicted the start of the boom in natural resources in 1999. ``There are 1.3 billion Chinese and 8 percent's a lot more eggs, a lot more bicycle tires.''

China's Risks
Even so, China poses risks because the country accounted for about 50 percent of the growth in industrial metals and oil during the past four years, Morgan Stanley chief economist Stephen Roach said.

"What's changed in the past week is that China is now moving more forcefully to slow its economy, taking actions to pop its equity bubble and slow down excessive bank lending,'' Roach said in a March 6 e-mail from New York. ``With downside risks building for the world's most commodity-intensive economy, suddenly investors are reassessing the demand side of commodity markets.''

Rogers, an outspoken proponent for investing in commodities during the past decade, said in a March 5 interview in New York that he ``wouldn't be buying much of anything right now except maybe agriculture and the yen.'' Still, ``commodities are in a long-term bull market that has years to go,'' he said.
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