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Commodities Fall From Grace

Economic Trends


They're out as a leading indicator

Industrial commodity prices, which have long been regarded as a key guide to emerging U.S. economic and inflation trends, are losing some of their charisma. The Conference Board, which is now responsible for compiling the composite business-cycle indicators that formerly were issued by the Commerce Dept., says it is dropping changes in sensitive-materials prices from the index of leading indicators.

Since materials prices carried the most weight in the 11-component index, that's no small move. But as BUSINESS WEEK has noted (BW--Feb. 12), plunging materials prices badly distorted the leading index last year, causing it to signal a weakening economy when the rest of the index was strengthening. That's not something the Conference Board's experts could ignore.

One reason industrial commodity prices have lost predictive power seems to be the shifting composition of U.S. output toward services and high-tech items with low commodity content. Consumption of spot commodities, which ran as high as 10% of nominal gross domestic product in the 1970s, was down to 4% by the mid-1980s and is probably even lower today. As the share of commodities in the GDP of advanced nations has shrunk, the link between commodity prices and both inflation and growth in those nations has weakened.

At the same time, rapid industrial expansion and infrastructure investment in developing countries, particularly in emerging Asia, are generating heavy demand for industrial raw materials. With Eastern Europe and Latin America joining the development parade, that demand will continue to grow.

Thus, though many economists now regard shifts in commodity prices as poor guides to near-term economic trends in the U.S., they see them as increasingly important indicators of global economic activity. And from that standpoint, observes Robert J. Barbera of Hoenig & Co., the recent declines in raw industrial-materials prices suggest that the expected pickups in Europe and Asia "continue to sputter."BY GENE KORETZReturn to top

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Computer science grads fare best

In light of rising rewards for specialization in labor markets, the choice of a field of study is becoming an increasingly important determinant of college students' future earnings. So which majors fare best--and worst--in today's skill-biased economy?

According to an Education Dept. survey of 1993 baccalaureates a year after graduation, computer science and engineering majors led the field with median starting salaries of $31,518 and $29,348 (in 1995 dollars) for men and women, respectively. Next came business and management majors ($26,986 and $23,165), and other professional and technical majors (around $23,700 for both men and women). Lowest on the list: education majors, with starting salaries of just $20,668 and $19,125.BY GENE KORETZReturn to top


The currency is stalling growth

Switzerland's policymakers are pressing the panic button. After failing to grow in all but one of the past five years, the nation has chalked up six consecutive quarters of negative growth.

The economy is caught in a deflationary spiral caused by a superstrong Swiss franc, which has been bolstered by fears about the impact of European monetary union on the value of the German mark and other hard-currency European assets. Reluctant to use fiscal measures to jump-start the economy, the Swiss have been trying to weaken the franc by cutting interest rates. But the discount rate is already at 1%, so there's little more they can do.

Meanwhile, by undermining the competitiveness of Swiss industry, the strong franc has exposed widespread business and government inefficiencies. The result is a wave of downsizing and restructuring that has pushed unemployment to 4.5% from its traditional level of 1%. Given these problems and Switzerland's "safe haven" currency status, its ability to post more than a modicum of growth over the next year or two, at least, appears highly problematic.BY GENE KORETZReturn to top

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