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Industrial Index Signals Recovery
Monday, 03 August 2009 00:00

JoC-ECRI index turns green for the first time this year, signaling budding manufacturing confidence

For all the debate over “green shoots” and “brown shoots,” it is increasingly clear that a global industrial recovery is taking root and is starting to fertilize economic recovery worldwide. But many of the patches remain barren.

The growth rate of the index of global industrial prices compiled by The Journal of Commerce and the Economic Cycle Research Institute moved into positive territory for the week ending July 24—the first time in almost a year. The move above the negative line signals an improvement in global demand for raw materials used in industrial production.

The index, which is based on the daily prices of 18 raw materials, ended the week 3.3 percentage points above the week before and was 4.5 percent above the index average over the previous 52 weeks. A week earlier, the IPI was down more than 5 percent.

“That’s a pretty dramatic recovery when you consider that we were at minus-69.3 percent on Dec. 19,” 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 over a 70 percent move, which is a lot,” he said. “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.”

Achuthan said ECRI’s leading indicators across-the-board are signaling a recovery.

“This is literally a textbook recovery. The likelihood that over a dozen leading indicators for the U.S. are missing something is extremely low, so we are very emphatic that the beginning of the recovery is at hand,” he said.

For most of the industrial world, however, that may mean it is only the beginning of a recovery. Carriers and their customers are watching closely for any signs that the broad indexes are translating into greater shipping demand.

“We’re seeing the volumes slowly creep up, but collectively for both imports and exports, we’re still far off from where we all need to be or want to be,” said Abed Medawar, president of Somerset Marine, a nonvessel- operating common carrier based in Hilisborough, N.J. “Exports to all over the world are well ahead of where we were at the beginning of the year, but imports remain well below the level where we’d like to be.”

The signs of recovery come because companies have drawn down inventories so low that they had no choice but to restock. “The free fall in economic activity is behind us,’ said Nariman Behravesh, chief economist of IHS Global Insight, a Lexington, Mass.-based economic forecasting firm. “The big question is: How much of this is related to the end-of-the-inventory cycle? Does that mean we have a sustained recovery in place, or does it mean we have a temporary bounce?”

He said the answer to this question would have the strongest ramifications in Asia’s export economies, particularly China.

The upturn in the business cycle so far is occurring in the U.S., U.K. and Asia. “The industrial upturn is now being joined by a broader economic recovery in those areas, but in continental Europe and Japan, the recovery is not yet in clear sight,” Achuthan said.

The issue now for companies such as ocean container lines and truckers is “whether they can last until the recovery starts hitting their business,” he said. Even in economies that have not started to recover, such as Europe and Japan, an industrial recovery is under way. “The export-oriented sectors may fare better than the broader economies because they are impacted sooner by an upturn in global trade. “We do see a global industrial cycle because we are all sourcing from each other,” Achuthan said. “Therefore, it’s becoming less common to see a strong upturn or downturn in manufacturing in one area that doesn’t impact manufacturing in another area.”

Achuthan sees the recovery coming in the production of machinery, equipment and commodities that go into manufacturing, which is “earlier in the pipeline” than the production of consumer goods.

When industrial activity restarts, the first place it happens is at the beginning of the supply chain, such as raw materials and components for manufacturing. “Then it will start to filter through into an actual car, for example,” he said. “As the recession draws to a close, cars will start breaking down, the fear of job losses will start to ease, credit will be easier to get, and car sales will come back.”

In the U.S., the economic recovery has started even without the spending of most of the $787 billion in the economic stimulus enacted by Congress.

“The business cycle wants to recover because of pent-up demand and lower prices, and a little bit of confidence. The stimulus still has to fall on top of that. The bulk of the stimulus will reinforce the recovery that will begin this summer,” Achuthan said. “That’s what the Industrial Price Index is showing.”

The IPI, which exceeded 132 a year ago, has fluctuated in the low 80s since June 5, and after two weeks of downticks, the index moved up to a 2009 high of 86.1637 for the week ending July 24, a level not seen since late October.

The JoC-ECRI Industrial Price Index was created in 1985 by Geoffrey H. Moore, the renowned 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.

Journal of Commerce, 8/3/2009