By Neil Irwin
Washington Post Staff Writer
Thursday, August 21, 2008
Financial markets are frazzled, and the jobs situation is getting worse. But there is a surprising bit of good news for the economy in the months ahead.
Prices for global commodities -- oil, of course, but also a variety of metals, agricultural products and other raw materials -- have been falling steadily since mid-July, after reaching record highs. Prices are still elevated, pinching consumers and businesses alike. But these modest declines should offer some relief to stretched American pocketbooks in the months ahead and help reverse some of the steep rise in inflation that occurred in the spring and early summer.
"When the price of oil has fallen by more than 20 percent, and other commodities from steel and aluminum to corn and wheat have all fallen in price significantly, it represents a cushion for the economy," said Sung Won Sohn, an economist at California State University. "It is one of the few supports that we have in the economy right now."
But the commodity drops aren't all good news. Part of the reason for the downward swing is that major world economies such as in Europe and Japan are slowing. So far in 2008, exports have been one of the few bright spots for the U.S. economy, resulting in ports humming with outbound loads. At the Port of Long Beach, for example, exporters are having to book shipping capacity far in advance, as there is far more demand for containers heading toward Asia than in the past. But if other countries slow down too much, so will their demand for U.S. goods, potentially nipping that source of growth.
The price of oil closed at $114.98 a barrel yesterday, down from $145.18 on July 14. That drop is starting to trickle down to the price Americans pay for gasoline; according to AAA, the average nationwide price was $3.99 a gallon yesterday, down from $4.34 a month ago. There have been similar declines in natural gas, gold, corn and many other commodities.
Gasoline and grocery bills are the most direct ways those prices filter through to ordinary people, but in the slightly longer run, the price drops could filter through to the broader array of products people buy, including such petroleum-intensive products as plastics. If nothing else, it could allow companies that have resisted raising their prices to continue to do so.
The economic stimulus rebates that went out starting in May coincided with the recent peak in gasoline and other fuel prices. "The fiscal stimulus provided extra money that helped people get through that period where commodities were at their peak," said Andrew Tilton, senior economist at Goldman Sachs.
Tilton notes that there are still plenty of things dragging down consumers. "The fundamentals of the labor market are still getting worse, asset prices are falling, credit is contracting . . . all of these things should be negative for consumer spending," he said.
Analysts caution that there are no guarantees that the lower prices on global commodity markets will stick around. Over the past three years, there have been several periods of retreat that proved only temporary.
"The good news is that lower oil prices puts more money in consumer pockets," said David Shulman, senior economist at the UCLA Anderson Forecast. "The bad news is that it could be signaling a global slowdown."
Traders in commodities markets are assuming that as economies slow across Europe and Asia, so will their demand for food and energy, and that lower demand will translate to lower global prices.
That matters more than usual this year. Exports rose at a 9.2 percent pace in the second quarter, reflecting relatively strong economies around the world and a steady drop in the value of the dollar. Without strong exports, the U.S. economy would have contracted in the second quarter; instead it recorded a 1.9 percent rate of growth.
That has many and varied impacts, favoring U.S. winemakers over their European counterparts, for example, and bolstering the domestic auto industry in what has otherwise been a horrendous year.
"Exporters are having to plan their schedules far in advance," said Richard D. Steinke, executive director of the Port of Long Beach, the California port that is a major entry point for cargo ships transferring goods between the United States and Asia. "It used to be only importers had to do that."