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A Framework That Provides Clarity

During periods of “low visibility,” confusion reigns: for every indication of one trend, there seems to be a countertrend. The key is to glean from the collective wisdom of reliable leading indicators a clear signal that the economy is headed for a turn.

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Commodities Show Boom as Recession Recedes


Raw-material prices are signaling the economy is in a "boom cycle" as the world exits the worst recession since World War II, said Lakshman Achuthan, a managing director at the Economic Cycle Research Institute.

The CHART OF THE DAY shows the Journal of Commerce Smoothed Price Index, which tracks the annual growth rate of 18 industrial commodities, rebounded from a record one year ago to reach the highest level ever this week. The index's rally predated U.S. economic expansion in the third quarter and signals average annual growth of 3 percent in the next two quarters as manufacturing increases, Achuthan said.

"The index is pointing to stronger industrial growth in the U.S. and abroad," said Achuthan, who in November 2008 told Bloomberg that the world was headed for its worst recession since at least 1981. "This commodity index is one of the best leading indicators of global industrial growth. There's been some confusion in looking at recent economic data. For the next few quarters, you can feel at ease looking at this index."

The index tracks the ratio of price changes from a year earlier. Half the commodities it monitors aren't traded on U.S. exchanges, including burlap, plywood and ethylene. In December 2008, the measure fell to minus 69.9, the lowest ever, before the U.S. contracted at a 6.4 percent rate in the first quarter of 2009, the weakest pace since 1980. The commodity index turned positive on July 21 and reached a record 71.5 on Dec. 8.

U.S. growth in the third quarter was 2.8 percent, after contractions in five of the previous six quarters, the Commerce Department said on Nov. 24. Growth will accelerate as industrial production makes the economic rebound "resilient," Achuthan said from New York. Rising demand also will support prices for raw materials, including crude oil and copper, he said.

"The risk here is that the boom-and-bust cycle does contribute to more volatility," Achuthan said.

"When you have a boom-and-bust cycle and you lay that on top of fairly weak average growth, it means there's an increase in the number of times there's a recession."