Boomtime prices without boomtime conditions

By Buttonwood

THE Economist's commodities index has notched up an all-time high in early 2011, and most analysts attribute the surge to demand strength. Our index excludes oil, but crude is now causing concern, briefly pushing past $98 a barrel yesterday. Throw in the recent strength of equities, and things would seem to be pointing to a very robust recovery.

But not every signal is flashing green. Take the Baltic dry index, often seen as a proxy for demand for commodities and thus economic growth. It has halved since October as the FT points out today. The Baltic may be distorted by a surplus of shipping, and the recent bad weather. There is better news from the Association of American Railroads, which recorded a 7.3% increase in carloads last year; however, that took tonnage back to 11.3 million, well down of the 12 million plus recorded in 2006. Similarly, the American Trucking Association, while announcing a 5.9% annual increase in November, is still reporting business that is down from 2006.

This combination of still-subdued activity and high raw material prices illustrates a wider truth; that America is no longer the price-setter for these products. Now it is Asia. One of the side-benefits of past US slowdowns was that commodity prices would fall, acting as a tax cut for consumers. But now consumer budgets are being squeezed at a time when unemployment is still high and wage rises are hard to come by. At least the US still produces commodities; Europe is in an even worse position, as this week's column argues.

Anyway it is one more thing for westerners to get used to as power shifts to the developing world. One can have boomtime prices without boomtime conditions.