Photograph by Maria Wachala—Getty Images/Moment Open
By Stephen Schork
March 19, 2015

Let’s be clear about this: commodity prices do not drive economic growth; economic growth drives commodity prices.

Keep this in mind the next time a talking head claims that the ongoing purge in oil is a “good thing.”

Oil prices have been slashed in half since the summer. This is undoubtedly known, but do you also know that lumber and copper prices are down by 25% or that aluminum prices are down by nearly 20%?

Now ask yourself, when has a fire-sale in the four most important industrial commodities ever been a sign of a growing economy? Here’s a hint: the next time will be the first time.
After all, in spite of all of the hyperventilating by media-economists on how U.S. economic growth is set to surge thanks to the “tax cut” at the pump, it is important to keep in mind that a cut in the price of a good is not economic growth.

For every penny drop in the board foot of lumber, ounce of metal or gallon of gasoline, there is a penny that will be spent elsewhere. This sounds great, until you realize that the amount of pennies being spent are not increasing. That is to say, it is a zero-sum game, a transfer of pennies within an economy is not an expansion of spending in that economy.

After all, the plunge in gasoline prices over the last six months did not prevent the circulation of cash through the economy from stalling at a 40-year low. What’s more, the declines have yet to pull the U.S.’ smokestack economy off of the ledge.

For instance, earlier this week the Federal Reserve Bank reported that goods and services produced in the manufacturing industry for February fell 0.2%, its third consecutive monthly decline. The rates of change for the total index in January, and for manufacturing in both December and January, were lower than previously reported. In fact, the January index was revised from a 0.2% rise to a 0.3% decline!

Over the last three months, retail gasoline prices averaged a six-year low of $2.282 per gallon, according to AAA. For comparison sake, at the end of February 2014, the three-month average was higher at $3.301. In fact, real gasoline prices are cheaper today than in 1974!

Be that as it may, consumers refuse to spend their gasoline savings elsewhere in the economy.

Last week, the U.S. Census Bureau reported a third straight sharp drop in retail sales. The headline number for February dropped 0.6%, as opposed to market expectations of a 0.3% rise.

The average drop in retail sales of 0.8% over the last three months is the largest decline since the three months following the collapse of Lehman Brothers.

Just as important, retail sales in the control group (which the Bureau of Economic Analysis uses to calculate GDP) has not risen since the plunge in gasoline began.

The control group factors out sales of food, autos, building materials and gas stations and therefore provides a good barometer on consumer spending exclusive of purchases vulnerable to fluctuating energy and commodity costs. This allows us to arrive at a more accurate picture of consumer behavior.

Unfortunately, the current picture of the U.S. consumer is not pretty. Yet oddly enough, Sheep on the Street continue to bleat that lower oil prices are good for the economy. Intuitively, the Street’s canard makes sense, but as we have seen throughout the extant plunge in oil, consumers refuse to follow Wall Street’s script.

Given that consumer spending drives more than two-thirds of the economy, you would think that Wall Street would stop rejoicing cheap gas (as well as cheap lumber, copper and aluminum), and concern itself with the economic forces pulling commodity prices lower.

Stephen Schork is the founder and editor of The Schork Report, a daily subscription newsletter providing daily views of the energy, cash and financial markets.


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