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Economy in Brief

World's Output Gains Lift Commodity Prices
by Tom Moeller November 27, 2006

Though a very recent slowdown in industrial output growth in the United States has garnered attention, compared to last year the nation's factories still are humming. That continued growth compares to an advance in factory sector activity elsewhere in the industrial world which has been firm.

Add to the mix the growth in China and the demand for raw materials has been firm, though the falloff in petroleum prices recently has dominated the headlines. Since 1980, there has been a 60% correlation between the y/y change in prices for industrial materials prices and the change in OECD Big 7 factory production.

Even with oil, the JoC-ECRIindex of industrial commodity prices has registered a volatile sideways drift during since mid-year. That's an impressive performance given the nearly one quarter decline in the price of petroleum products.

Higher industrial metal prices reflect the world's resilient factory sector (see table above). The JoC-ECRI Industrial Metals Prices Index is up by more than one third from last year on the strength of a 70% y/y advance in copper scrap prices which are roughly double what they were in 2005 and firmness in zinc prices which have roughly tripled since 2005. Additional strength stems from spot aluminum ingot prices (27% y/y) though prices for stainless steel scrap have been flat to down (-15 y/y) with the weakness in auto production which is off by roughly one quarter since early 2002.

Textile prices certainly are lower than the peak levels of earlier this year. Much of that decline reflects a recent weakness in cotton prices (-6% y/y) though both the JoC index of textile prices and cotton prices in particular have shown recent gain.

Natural gas prices have ranged widely since last winter's spike. A recent lift has taken gas up sharply from the recent low (-33.2% y/y) early this past October. While weather forecasts account for the bulk of the short term movement in gas prices, industrial demand is estimated to account for 37.6% of natural gas demand which is the highest of any sector. A report from the Natural Gas Supply Association is available here.

Gold prices as well have shown some lift to $645 per ounce, a rise of roughly one quarter since last year. The Unreliability of Inflation Indicators is a 2000 article from the Federal Reserve Bank of New York and it can be found here.

Inflation, Inflation Expectations, and Monetary Policy, a speech by Sandra Pianalto, President & CEO of the Federal Reserve Bank of Cleveland can be found here.

Industrial Production (Y/Y %) 2005 2006 (YTD)
OECD Major 7 Countries 1.9% 3.6%
  United States 3.2% 5.2%
  Germany 3.4% 6.4%
  Japan 1.6% 5.0%
China -0.3% 1.3%
Weekly Prices 11/17/06 12/27/05 Y/Y 2005 2004 2003
JoC Industrial Price Index - All Items 126.34 117.73 8.4% 114.19 112.78 91.97
  Metals 174.62 132.45 39.8% 121.30 118.15 84.56
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