Peter T. Leach | Jul 27, 2009 9:37AM EDT
The Journal of Commerce-Economic Cycle Research Institute index of global industrial prices moved into positive territory for the first time in almost a year for the week ending July 24, signaling an improvement in global demand for the raw materials that go into industrial production.
The Industrial Price Index, based on the daily prices of raw materials used in industrial production, ended the week growing 3.3 percentage points to 86.1637, the highest point IPI has reached since Oct. 24, 2008.
The improvement marked a 4.5 percent improvement over the index’s average over the previous 52 weeks, the first time it has grown since the first week of Aug. 8, 2008, shortly before the onset of a steep decline in world financial markets.
“That’s a pretty dramatic recovery when you consider that we were at minus 69.9 percent on Dec. 8,” said Lakshman Achuthan, managing director of ECRI, the New York-based economic forecasting firm that compiles and tracks a number of leading indicators for economic activity around the world.
“That’s very consistent with the restarting of global industrial activity. In some cases that’s associated with an outright upturn in the business cycle of some economies,” he said.
The upturn is occurring in the United States and Asia, excluding Japan and the United Kingdom, he said. “The industrial upturn is now being joined by a broader economic recovery,” Achuthan said. “But in continental Europe and Japan, the recovery is not yet in clear sight.”
Even in Europe and Japan, the export sectors may fare better than the general economies because they are impacted sooner by an upturn in global trade, he said.
The IPI has fluctuated in the low 80's since June 5, and after two weeks of downticks, the index moved up 3.33 points to a 2009 high of 86.1637 for the week ending July 24.
On a strict year-over-year basis, the index remains far below the 132.2840 recorded a year ago, but the sequential increase suggests growing confidence and competition for raw materials in industrial markets.
The JoC-ECRI Industrial Price Index was created in 1985 by Geoffrey H. Moore, the economist who pioneered the study of business cycles at the National bureau of Economic Research, where a committee of economists that he established is still the official judge of when the U.S. economy goes into and out of a recession.
The index is based on the prices of 18 industrial commodities that are tracked by the index that is compiled every weekday by The Journal of Commerce and ECRI.
The index is based on what ECRI economists call the “bullwhip effect,” which describes how small shifts in the growth of consumer demand are amplified through the supply chain into big swings in price at the wholesale level.
The JoC-ECRI Industrial Price Index has a remarkable record as a barometer that can forecast broad trends in the world's industrial economy.
The JoC-ECRI index differs from other commodity indexes in several ways. It is not a weighted average, but a pure reflection of prices. It does not include agricultural commodities or precious metals such as gold or silver, but only materials that are used in industrial production, such as nickel, tin, aluminum, plywood, benzene, cotton, burlap and crude oil.
In addition, half the commodities in the index are not "exchange-traded" commodities, which means their prices are not established on the floors of any of the world's commodity exchanges.
This serves as a reality check on the prices of the other half, so the index cannot be skewed if a hedge fund or a speculator tries to manipulate the price of a commodity, as the Hunt brothers tried to do in 1980 when they bought half of the world's deliverable supply of silver.
Contact Peter T. Leach at pleach@joc.com.
