Tuesday, November 17, 2009

Industrial production and commodity prices

Supply-siders try whenever possible to look at market-based indicators of what is happening in the real world, rather than indicators that come from government statistics offices. Government statistics can be misleading, they can lag reality by months, they can be revised after the fact, and they can be subject to distortions and incorrect adjustments. Market-based indicators, however, are real-time, and they reflect the combined actions and wisdom of hundreds of millions of people all over the world. If I want to know what is happening today, on the margin, I would always prefer to look to market prices rather than government statistics.

So these two charts are quite different in that the top chart comes from government offices whereas the bottom chart comes from the market. But as I think should be evident, they tell approximately the same story. The top chart shows the path of industrial production in most of the industrialized world, while the bottom chart shows an index of spot industrial commodities. The message: stronger production tends to correlate with higher prices and vice versa. Both prices and production are rising on the margin, so this reflects a positive picture of growth around the world.

The differences in these charts are also instructive. Note that industrial production has fallen so severely, even despite this year's rebound, that is has effectively wiped out most or all of the gains of the past 10 years. Yet commodity prices have almost doubled over the past 10 years. I take this to be a sign that accommodative monetary policy has been an important source of commodity price gains, and that is a portent of price inflation that could find its way into prices throughout the global economy in coming years.

The other message of these charts is that all central banks are probably guilty of pursuing overly-accommodative monetary policies. All currencies have lost significant value relative to gold and commodity prices in recent years. Rising commodity prices are telling us that the global economy is rebounding and that inflationary pressures are percolating. It's past time that central banks started taking their feet off the monetary accelerator, particularly the Fed, since the dollar has fallen much more than other currencies.


Unknown said...

Two very positive signs.
1.S&P operational cashflow very high
(I use short url)
2.On swaps, I took it from your posts, and checked 2/5/10 years.
Looking at 5 years range.
a)2 years swaps
They are now in 2005-2007 range
b)5 years swaps
They are now 22% below the lowest level in last 5 years
c)10 years swaps

They are now 75% below the lowest level in last 5 years (sic!).

Coul you plse comment on this.

Public Library said...

With the Fed low for looong, I am short the dollar and long commodities and some EM. Until somebody says something credible about rates, I see no reason to change course.

Scott Grannis said...

Family: I agree those are all very positive signs. I have stopped mentioning swap spreads because they have been back down to normal levels for many months now. They are of course leading indicators, so we still have good things to look forward to.