What are the Metals Telling Us?

Floyd Norris puts forth an interesting theory about metals: While they have been historically early indicators of booms and busts, something might be changing. Are metals no loner a leading indicator of the US economy? Norris posits that may be the case:

"An index of spot metals prices [CRB/Reuters] has been around for a quarter-century. It concentrates on metals that move the fastest when economic conditions change, and that has made it volatile. But even with that volatility, not until 2003 did it manage to go up 50 percent in a 12-month period, and that was an increase from the very depressed prices that came with the worldwide slowdown early in this decade. The rise left the actual price level well within historic norms.

But starting in late 2005, the level of prices began to rise in a way that would have seemed normal to a technology stock investor in late 1999. At the end of last month, the 12-month increase was 99.6 percent. An index that first went above 400 a year ago topped 750 early this month…

For most of its history, the index was a relatively good indicator of activity in the United States, the economy that used the most raw materials. But the American economy did not surge in 2006. Instead, it seemed to be slowing a bit, and the forecasts for 2007 are far from euphoric."

Why is that? As Norris observes, the US "is no longer sure to be the
marginal buyer of economically sensitive materials. That honor now goes
to Asia, particularly China."

I still believe the Metals index can forecast economic activity — the
shift however, is that its forecasting global, rather than just the US
economic growth.

And given the growing manufacturing might of Asia (and China in particular), the reduced manufacturing base in the U.S., and the slowing economy  here, metals may still be useful as a global rather than local, forecasting tool.

S>


CRB index: prices of zinc and tin, steel scrap, copper scrap and lead scrap
23chart_lg
graphic courtesy of the NYTimes

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Source:
A Historically Accurate Indicator for the U.S. May Not Apply Anymore
FLOYD NORRIS
NYT, December 23, 2006
http://www.nytimes.com/2006/12/23/business/worldbusiness/23charts.html

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