U.S. Economy Not Out of the Woods Posted by LTK007 on another thread.
Jul 14 6:11pm ET
By Alden Bentley
NEW YORK (Reuters) - Sliding commodity prices in the first half of 2001 were symptomatic of faltering global growth and weak foreign currencies, and are still a warning that hopes for a U.S. economic turnaround may be premature, according to economists.
Weak demand for the raw ingredients of economic growth argue against overconfidence that the United States will dodge the recession bullet, especially with the dollar flexing its muscles, Argentina's economic crisis, and Japan's woes threatening another bout of regional contagion, market experts said.
World prices of goods from farms, forests and mines entered the second half flirting with their lowest prices since Asia was nosing out of its 1997-98 currency crisis, reviving the dreaded "D" word -- deflation -- which already appears to have Japan in its grip.
"Global growth is weakening faster than people expected. Nowhere do you see that more than in Southeast Asia, which from your perspective is important because incrementally non-Japan Asia is, per dollar GDP, the largest commodity user in the world," said Richard Berner, chief U.S. economist for Morgan Stanley Dean Witter, in a phone interview.
The Bridge/Commodity Research bureau futures index of 17 commodity prices -- used by some economists as a benchmark -- was at 207 this week, 2 percent above a 1-1/2 year low set June 27 at 204. A downturn in sky-high energy prices early this year exaggerated the fall to some extent, economists said.
But more to the point, the resilience of the greenback to the U.S. slowdown curtailed demand from struggling economies in Asia and Europe for dollar-priced industrial materials, fibers and food products and raised the specter of a return to the two-decade low in the index near 183 set in 1999.
That year, talk of commodity-led deflation proved overblown, because the expanding U.S. economy was big enough to stave off world recession, averting a malevolent spiral of falling prices and deferred consumption.
But with the United States growing at just 1.2 percent annual rate in the first quarter of 2001, it is unlikely to be such an engine for the global economy this time, even if the six interest rate cuts by the Federal Reserve since January actually get consumers and businesses to spend freely again.
"You definitely have some semblance of deflationary concerns in there," said Dan Antonellis, market strategist at Briefing.com. "What the commodity markets as a whole are telling you is that central banks as a whole haven't done enough to promote recovery."
The Goldman Sacks Commodity Index (GSCI), another key barometer, is down 13 percent for the year. That index is weighted more than 50 percent toward petroleum, a different skew than the more agriculture oriented CRB.
According to the GSCI on Wednesday, energy prices are down 13 percent year to date, coming off the very high levels hit before inventory tightness started to abate in time for summer driving. Oil, gasoline and natural gas prices are still up 6.5 percent from a year ago.
Agricultural goods are down 10.5 percent over the last 12 months. Before rallying in recent weeks, wheat futures in Chicago hit a 10-1/2 year low in late June, New York cotton made 15-year lows while coffee plumbed its cheapest levels in London in three decades.
Industrial metals are down 9 percent, with copper at two-year lows on metal exchanges in New York and London.
"I guess copper is always regarded as one of the leading indicators. That is clearly an area where there is slowing growth in demand and excess capacity," Berner said.
Earl Sweet, assistant chief economist at Bank of Montreal Harris Bank in Toronto, said one concern is that the countries worst hit by the financial market crisis four years ago are facing another severe test before adequately addressing structural problems and reforming their economies.
"If that's the case, we could have problems in Southeast Asian economies and they are obviously users of many commodities," Sweet said.
But Sweet said construction and industrial commodities are likely to ride out the cyclical slowdown, pointing to production cuts this year in base metals like aluminum and copper as constructive.
"Once the economy picks up in North America, I think that inventories are in pretty good shape and we'll probably see some firming up in base metals prices," he said.
"We have also seen the housing sector in both Canada and the U.S. holding up exceptionally well in the face of the slowdown. Lumber got into an oversized inventory situation a while back but that will be corrected," Sweet added.
The main worry is demand from Japan -- again teetering on recession after being in the economic dumps for the better part of a decade -- and the huge shadow it casts over trade with its neighbors in the Pacific rim.
And investors were bailing out of Latin America this week on fears that Argentina would not implement stringent austerity measures designed to enable it to repay its debt.
"You've seen the competitive devaluations there, specifically in your Asian regionals and emerging market currencies. That's kind of confirmed what has been going on in the commodity market lately," said Antonellis.
Hopes for a turnaround in corporate earnings hoisted the Dow Jones industrial average 237 points on Thursday. The technology filled Nasdaq index soared 103 points, raising some eyebrows and questions about how stocks can rally amid worrisome economic news from emerging markets and Europe.
"When you start to get a little bit more credible signs in the equity market that we've bottomed and maybe going higher, I think you need to look over at what's going on in commodities," said Antonellis. "If they are trending higher, and the puzzle starts to fit together, I think it's much easier to bet bullish on everything.
But, he concluded, "not everything is lining up perfectly and there still seems to be some problems if you focus on commodities." |
