Commodity Prices Fall: That's Welcome News for Some, But Not a Big Boost to State
For a manufacturing-intensive economy like Michigan’s the markets produced some potentially good news last week as fast-rising commodity prices – notably the price of crude oil – began to fall off.
Lower prices for raw materials and energy would be welcomed by businesses worried about rising costs. But even if the commodity price bubble bursts for good, lower prices for things like gold, copper, cotton, food crops and oil won’t be a magic bullet for the Michigan economy.
According The Wall Street Journal, the Dow Jones-AIG Commodity Index fell about 10 percent from March 13-March 20, after having risen 18 percent from the beginning of the year through March 13. Meanwhile, crude oil was trading at below $102 a barrel last week, down from a high of just above $110.
Dana Johnson, chief economist with Comerica Bank, said the sharp drop in the commodity prices is “much more of a financial markets story than a real economy story” because, apart from oil, commodity purchases are a relatively small part of the U.S. economy. Things like the current credit crunch – and the housing crisis that caused it – are having a much bigger impact on the real-world economy, Johnson said.
“We’re still going to have a recession,” Johnson said.
A survey of analysts published Friday at Bloomberg.com found that most expect crude oil prices to drop some more this week, “as the dollar rebounds and the slowing U.S. economy curbs consumption of fuels.” Concern about overall commodity prices was enough to hit the Canadian dollar with its biggest drop since 1985. The Canadian economy relies heavily on commodity exports, including oil produced from oil sands in Alberta.
That would be welcome news to some purchasing managers. According to David R. Allardice, a Walsh College professor who maintains the Metropolitan Detroit Purchasing Managers’ Report, high energy prices and high input costs – along with the potential for a national recession – were primary concerns among purchasing managers surveyed last month.
Allardice said it is too soon to know whether the recent drop-off in commodity prices will ease those concerns. That’s because it could take a while for any impact to be felt in the real-world supply chain of companies that buy raw materials.
Johnson said it is “entirely plausible” that oil prices could keep falling for some time. However, he said, even if oil prices dropped to $80 per barrel or below, the mix of cars and trucks purchased by U.S. consumers would be unlikely to change very much. That means the Detroit Three automakers – whose line-ups are less fuel-efficient than those of those of foreign competitors – can’t count on a correction in gas prices to boost sales.
What’s causing the drop in commodity prices? According to The Wall Street Journal, much of it is being caused by "deleveraging" as investors take profits made in commodities to raise cash needed to cover losses experienced in credit markets.
Johnson says he expects commodity prices to continue a downward slide, as the recent interest-rate cuts and other moves by the Federal Reserve make other kinds of investments more attractive and as speculators are drawn to other markets.
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For a manufacturing-intensive economy like Michigan’s the markets produced some potentially good news last week as fast-rising commodity prices – notably the price of crude oil – began to fall off. 
