Raw-Material Gauge Signaling Demand Pickup on Outlook for China

A gauge of raw-material prices ranging from burlap to steel may point to improving global growth amid signs of an industrial recovery in China and the U.S., the biggest users of commodities.

The Journal of Commerce-Economic Cycle Research Institute Industrial Smoothed Price Index, which tracks the annual growth rate of 18 commodities, rose today to its highest since September. Nine components, including ethylene and red oak, aren’t traded on U.S. exchanges and are less influenced by investor sentiment.

A U.S. budget impasse and Europe’s recession sent the Standard & Poor’s GSCI Spot Index of 24 commodity prices down as much as 11 percent since reaching a five-month high on Sept. 14. Since then, government reports showed signs that the U.S. housing market is recovering while Chinese manufacturing in November expanded at the fastest pace in 19 months. The U.S. and China are the two biggest commodities users. Goldman Sachs Group Inc. said this month that growth in emerging markets will boost demand for raw materials and tighten supply.

“Chinese economic growth could give a real shot of adrenaline to many commodities,” said Chad Morganlander, a Florham Park, New Jersey-based fund manager at Stifel Nicolaus & Co., which oversees about $130 billion of assets. “We’re optimistic about growth on a global basis as well as a resurgence in commodities markets.”

China’s economy may have rebounded after a seven-quarter slowdown as the government boosted spending on infrastructure and accelerated investment-project approvals. A Purchasing Managers’ Index climbed to 51.5 in December, the highest since May 2011, HSBC Holdings Plc and Markit Economics said today. A level above 50 indicates expansion.

Budget Talks

U.S. tax increases and spending cuts scheduled to start tomorrow may still send the U.S. economy into a tailspin unless lawmakers come to a budget agreement.

“There’s reason for caution” on economic growth prospects, said Jonathan Guyer, the chief investment officer of Longview Funds Management LLC in Columbia, Maryland, who helps oversee about $19 million of assets.

Even so, there are signs that the global economy is starting to improve, and measures including the JoC-ECRI index often have “less noise, and reflect real demand,” Guyer said.

The JoC-ECRI tracks the ratio of price changes from a year earlier. The index rose to 7 today, the highest since Sept. 20. It averaged minus 3 last month and minus 6.6 percent this year. The S&P GSCI was down about 0.1 percent this year through Dec. 28.

To contact the reporter on this story: Joe Richter in New York at jrichter1@bloomberg.net

To contact the editor responsible for this story: Steve Stroth at sstroth@bloomberg.net

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