Wednesday, May 4, 2011

Commodities, Global Growth, and U.S. Inflation

Today, 5/4/2011, commodities are falling.  In looking at a short list of commodities, I only see corn and ethanol up.  I have done a series of most recent posts on just these subjects: copper, growth and inflation in the U.S., is it time to sell gold and silver, and the global economy and commodities direction.  Consequently, what is happening today should not surprise.

James Hamilton on the Econbrowser has an interesting post today on the relation of a surge in oil prices and the beginning of recessions in ten of the last eleven recessions.  Such surges have an impact on auto sales (as demonstrated in 2008), and I have seen anecdotal information that auto sales of fuel efficient vehicles are up and retail sales are down.  We have previously noted that retail sales in Germany were down 2.1% in March on lower food and clothing purchases.  Hamilton expects a smaller response now, because the public did not revert to larger vehicles after 2008 and the high prices of less than three years ago have not yet been reached.  Yet, prices here in central Illinois are up to $4.29 per gallon, which means it is higher in urban areas.  Hamilton is in San Diego.  He does not see the non-linear relationship have yet reached the level necessary to predict a recession.

Via Mark Thoma at Economist's View, there is an article that posits high commodity prices are reflective of less productivity, which may be from bad weather, but the author believes that it may be a longer run phenomenon.  If you remember, in our most recent post, Jeremy Grantham is predicting a decline in commodities and we are seeing a broad sell off today.  In a more recent article by Michael Roberts at Greed, Green and Grains, he shows data that the heat in 2010 in the U.S. was not as hot as expected and the crop yield was consistent with the heat levels.  If 2011 is cool, it should be better.  Here in Central Illinois planting is only about 10% completed as it is being delayed by more rain than usual.

Oil shed 2.6% yesterday and is down again today.   The EIA weekly petroleum supplies report came in today worse than expected with oil supplies up 3.4 million barrels, gas supplies down 1 million barrels, and distillate supplies down 1.4 million barrels.  Part of the decline in oil is being attributed to fear the global economy is slowing down based on the different sales and manufacturing reports which have come out this week and last.

A St. Louis Federal Reserve paper is placing the blame for headline inflation on fuel prices rather than fuel and food.  We have already commented on the over reaction of the Federal Reserve to headline inflation and that inflation is actually well contained.  With the Federal Reserve over reacting to inflation expectations, it is almost as if, rather than having an inflation target (which we are below), the Federal Reserve has created an inflation ceiling which could negatively affect economic growth.

Yesterday, Marshall Auerback had an excellent article on how global growth is slowing, although as Tom Duy has observed that the Fed will not be doing a QE3, I respectfully disagree (because I understand his reasoning with respect to QE2) with Marshall Auerback that the Fed will continue its weak dollar and loose monetary policies.  Bernanke clearly communicated a growing concern with inflation (headline not core although core is trending up to the target 2%).  As commodities have fallen today and the prior two days, the dollar is stronger.  As I would expect, Auerback correctly sees the asinine problem of focusing on a debt limit, the potential implosion of the eurozone, declining retail sales in Germany and Spain, the tragic drama of Ireland (as compared to Iceland) as the European monetary Union debates whether it should act in its own best (banking sector) interest and truly support Ireland's economic recovery, and China's tightening and the direct effect on investment in GDP --- all of which we have also written.  Auerback also correctly adds the destructive IMF deficit thinking in Japan which may cause Japan to curtail and delay necessary reconstruction.  Edward Hugh believes that Japan is in a recession, as we have already written in our last post, and that reconstruction will spur a pick up in the second half of the year, but he is not convinced that reconstruction will be the spurt of economic growth for Japan as it has historically been for other economies.  On the other hand, the Australian economist Bill Mitchell maintains (and I have every reason to believe Marshall Auerback is in agreement with him) that economic growth through reconstruction in Japan is merely a matter of proper fiscal policy.  Global growth is slow, but we do not need to beat the slow horse dead with destructive austerity and deficit fear when it is the job of government to respond to aggregate demand when the private sector does not or cannot and/or the external sector contribution is not sufficient.  The choice in Japan, the United States with it continuing high unemployment, and the eurozone credit crisis is the choice between recession and economic growth. 

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