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Cattle Hides Instead of Entrails as Omens of Economy

Two thousand years ago, the haruspices of ancient Rome peered at animal entrails to divine the future. Today’s seers have refined the technique, searching for clues to the fate of the global economy -- and the modern omens aren’t promising.

A gauge of growth rates for raw materials including cattle hides, tallow, plywood and burlap has been signaling economic contraction since September. The last time the growth rate of the JoC-ECRI Industrial Materials Price Index was falling to these levels, the world was mired in recession. At the same time, the price-tracking Bloomberg Commodity Index is near a 12-year low, with bear markets for more than half of the 22 items it measures.

The decline in commodity prices is consistent with a prolonged period of slow global growth,” Alan Greenspan, the former chairman of the Federal Reserve, said in a Feb. 18 telephone interview. “We may very well be accelerating in the months ahead, but evidence is hard to find in the data.”

A major reason is slowing growth in China, the world’s biggest user of metals, grains and energy, and weakening economies across Europe. While demand suffers, output has surged for everything from oil to wheat, creating global surpluses that sent prices plunging.

The JoC-ECRI index tracks the growth rate for prices of 18 commodities, including some not traded on exchanges such as ethylene and red oak. The gauge has been negative since Sept. 15 and on Feb. 11 reached the lowest since May 2009. The Bloomberg index plunged 24 percent in past the 12 months, led by a 52 percent plunge for crude oil.
‘Other Half’

While expanding commodity surpluses explain part of the slump, some investors are missing “the other half of the story, which is a drop in demand,” Jay Morelock, an economist at FTN Financial in New York, said in a Feb. 19 telephone interview.

Rather than helping to spur economic growth by providing consumers with cheaper supplies, a prolonged commodity decline raises the prospect of a damaging period of deflation, when companies forced to cut the price of their products start to postpone investment and hiring, Morelock said.

Wal-Mart Stores Inc., the world’s largest retailer, saw food deflation reduce same-stores sales in the U.K. and China in the fourth quarter, David Cheesewright, head of the Bentonville, Arkansas-based retailer’s international unit, said on a Feb. 19 conference call.

In China, a measure of manufacturing in January signaled contraction for the first time since September 2012. The nation’s copper imports dropped last month by 24 percent from a year earlier, the eighth straight decline, and output of crude steel rose in 2014 at the slowest pace in at least 24 years.
U.S. Accelerates

Not all indicators are dire, with growth accelerating in the U.S., the world’s largest economy. Moline, Illinois-based Deere & Co., the largest maker of farm equipment, said Friday that increased domestic building will lift revenue for its construction and forestry unit by 5 percent in the fiscal year through October.

More global stimulus will help revive economies and stem the commodities rout, Jason Schenker, the president of Prestige Economics LLC in Austin, said in a Feb. 2 telephone interview. The European Central Bank pledged $1.2 trillion in bond buying, and Japan is buying assets. Canada, Singapore, Denmark, Russia and Switzerland all eased monetary policy last month.

“Sometimes market signals represent noise,” Neil Dutta, the head of U.S. economics at Renaissance Macro Research in New York, said in a Feb. 20 interview. “I think the outlook for the global economy has been improving, particularly in Europe and Japan. You have oil prices falling, that’s going to be a tailwind for European and Japanese consumers.”
Goldman Outlook

Goldman Sachs Group Inc. still expects more declines. Raw materials will lag behind equities, bonds and credit markets over the next three months, the bank said in a Jan. 27 report, predicting commodity losses of 10 percent. Crude futures in New York will fall to $39 a barrel, Jeff Currie, Goldman’s New York-based head of commodities research, said in an interview on Bloomberg Television Feb. 19. Prices rose 0.7 percent to $49.80 at 12:06 p.m. in London.

The slump in the JoC-ECRI index “tells us that the weakness in industrial commodities is a lot broader than just oil,” said Lakshman Achuthan, the co-founder of New York-based Economic Cycle Research Institute, the group that compiles the measure. “This is suggestive of demand weakness.”

Even as the U.S. labor market improves, Fed officials cited China’s slowdown as a “factor restraining economic expansion in a number of countries,” and noted continuing risks from “global disinflationary pressure,” according to minutes of the Jan. 27-28 policy meeting released Feb. 18.
Slower Growth

The International Monetary Fund last month cut its global growth forecast to 3.5 percent from the 3.8 percent pace predicted in October, the steepest cut to its outlook in three years, citing slowdowns almost everywhere except the U.S.

The measure of commodity prices underlying the JoC-ECRI growth index is heading for a seventh straight monthly loss, the longest streak in 13 years. During the last downturn, the gauge fell for six months through December 2008.

“The markets are leading indicator of what’s going to happen in the economy, and commodity markets are no exception to that,” Guy Lebas, the chief fixed-income strategist at Janney Montgomery Scott LLC in Philadelphia said in a Feb. 20 interview. “Weaker demand, which implies slower manufacturing output worldwide, is probably one reason commodity prices are down. Falling prices are a sign that global industrial production is slowing.”


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