July 9, 2012 at 3:26 PM ET
The slowing global economy is putting downward pressure on costs for businesses and consumers alike. It’s also squeezing profits and incomes.
The weak job market has helped keep wage costs flat since the recession ended three year ago. Now, with widening evidence that the global economy is entering a new slowdown, the cost of a wide range of commodities from oil to copper to coffee is falling rapidly.
While that's good news for consumers, the across-the-board price drops are further evidence that demand is drying up as the world economy continues to slow. China’s once booming economy has cooled sharply this year. That has driven prices down sharply in the world’s second-largest economy and has raised worries about deflation, which can be as intractable a problem as too much inflation.
Recent data on factory production and job growth point to a further slowing in an already weak U.S. economy. And the ongoing financial turmoil in Europe has sparked a widening recession that shows no signs of easing.
One widely watched index tracking two dozen commodities -- everything from energy and metals to food -- has fallen more than 10 percent in the last three months. The prices of corn, cocoa, oats, cotton, rubber, coffee, aluminum, silver, zinc and nickel are all more than 20 percent lower than a year ago.
Some of the biggest savings have been in the price of oil, one of the most widely used commodities, which has fallen roughly 20 percent this year.
The drop is expected to continue as demand weakens further.
“Economic slowdown is always going to put pressure on oil prices," said Robert Montefusco, a commodities broker at London-based Sucden. ”If we don’t sort this euro crisis out, oil prices will come down further because there won’t be any demand. We’ll have static growth.”
For the average household, which burns through about 1,200 gallons of gasoline a year, each dime of lower pump prices adds up to about $120 annual savings, according to the Oil Price Information Service. Those savings could help spur growth if they translate into higher consumer spending.
So far that hasn't happened, largely because a weak job market in the U.S. has sent consumer confidence falling again. The latest sales results from retailers confirm that households are keeping a tight rein on spending until the economic outlook improves.
Companies should get a boost from falling raw materials costs too. But for many, demand appears to be slowing faster than costs are falling. For large companies, especially those with a large presence in Europe, the upcoming round of earnings reports is expected to reflect the impact of the global slowdown on the bottom line.
“There's a lot of negative headwinds heading into this earnings season," said Ashwani Kaul, at Kaul Advisory Group, a research firm. “With the negative impact of the euro, it’s just not just because companies are seeing a slowdown in Europe. They’re seeing currency translation issues -- companies like Starbucks, McDonald’s, Procter and Gamble -- companies that rely heavily on the euro.”
While the drop in commodities recently reversed course, prices have retraced only a portion of the drop so far this year. Part of that came in response to recent moves by central banks around the world to spur global growth by pumping more money into the banking system.
But credit continues to contract in Europe as investors in the credit markets grow increasingly weary of repeated announcements by Europe’s leaders that fail to provide solutions.
Falling prices and mounting evidence of slower U.S. growth have increased speculation that the Federal Reserve may soon announce another round of easy-money policies, the third since the financial collapse of 2008. Though the move may provide a short-term boost for investors, most Fed watchers and economists don’t expect those moves will do much to spur growth.
“The global environment is weakening and I’m afraid were getting negative synergies among the major economic zones of the world,” said Charles Dallara, managing director of the Institute of International Finance. “I think what we’re seeing on the central bank front is positive but it is not enough to alter fundamentally weak outlooks.”