Commodity prices free-fall not a recession indicator – economist

NEW YORK (Reuters) – Tumbling commodity prices suggest the global economy is headed toward recession, but the free-fall has more to do with excess capacity than a warning about the world’s economic health, economist and market strategist Ed Yardeni said on Thursday.

Very high capacity was built in anticipation of a commodity super-cycle, and the free-fall does not indicate pending doom, said Yardeni, founder and president of Yardeni Research Inc., at the Reuters Global Investment Outlook Summit in New York.

“I don’t think it’s demand that’s falling off a cliff,” he said. “Because so much capacity was built into the commodity space anticipating a super-cycle, that now that all those assumptions have fallen apart, guess what? They can’t get out of their own way.”

The rise of the middle class in developing countries such as Brazil, India and China led to the belief that there would be booming demand for commodities for decades – creating a so-called super-cycle of high commodity prices.

Commodity companies have increased production in reaction to plunging prices in a bid to put their rivals out of business, said Yardeni, who was for almost 30 years either chief economist or market strategist at EF Hutton, Deutsche Bank and other well-known Wall Street firms.

The Thomson Reuters/Core Commodity CRB Index has declined more than 60 percent since peaking in July 2008. The futures index of 19 commodities on Wednesday fell to its lowest level since late 2002, or lower than the depths of the Great Recession.

Commodities indexes are a favorite of Yardeni’s as economists look to their consumption as an indication of global economic growth. For that reason, Yardeni said he did not wish to be too dismissive of the price level.

“Maybe I’m not paying attention to my own indicator,” he said. “Whenever you have something free-falling like this, you don’t want to be too blasé about it.”

However, the build-out in commodity production was financed through bonds or corporate equity and not bank credit, limiting any blow-ups, he said.