Rising Commodity Prices Hide Longer-Term Challenges

As major economies continue to expand moderately, it's not surprising that commodity use is increasing and many prices are rising. The Bloomberg Commodity Index is up 20 percent since early 2016. Crude oil prices have more than doubled since bottoming in February 2016. The MSCI World Metals & Mining Index of equities has risen about 90 percent since the start of 2016, topping the 30 percent gain for the MSCI All Country World Index.

Yet the rosy outlook presented by financial markets masks challenges for commodity producers from a broader transition in the economy: A greater share of economic spending is on services and a declining portion of outlays is for goods. In 1947, 61.6 percent of U.S. personal consumption expenditures was devoted to goods and 38.4 percent to services. In 2017, those shares were 32.3 percent and 67.7 percent, respectively. The same dynamic is at work in emerging economies such as China. In the services sector, consultants use some commodities via computers, but the vast majority of the output is in analysis and experience. Among goods, in contrast, vehicles are largely composed of commodities such as steel, aluminum and rubber.