Commodities boom signals economic gains

A key Standard & Poor's index of commodities is up 24 percent in the last year, a reflection of price hikes for a broad range of raw materials such as oil, copper, wheat, and cotton.

The S&P GSCI index now is at its highest since September 2008, the start of the nation's financial meltdown.

While the price increases may eventually prove troublesome for consumers, U.S. investors should welcome, not fear, them.

The rises are "largely a reflection of the fact that the pace of economic growth, particularly in the U.S., has picked up," said Nariman Behravesh, chief economist at consultants IHS in Lexington, Mass., and a former Federal Reserve official who has been covering the global economy for more than 35 years. "It's not something to be worried about."

Investors have been concerned that rising costs for energy and other raw materials needed by manufacturers might derail the U.S. recovery by robbing consumers of purchasing power and pinching corporate profit margins.

History suggests they're wrong to be concerned, said Michael Darda, chief economist for MKM Partners in Stamford, Conn. Commodity prices usually move in tandem with U.S. production, personal income and the stock market, so the increase is a reason to be bullish, not bearish, about the outlook, he said.

"High commodity prices are the result of rising demand, not the cause of future economic weakness," Darda said. "Over the last decade, commodity prices and the U.S. stock market have usually moved together."

He sees the Standard & Poor's 500 Index rising to 1,425 this year from its current level of about 1,282 as the economy grows by about 4 percent. The U.S. expanded by an estimated 2.9 percent in 2010. The government will report the figure in late January.

Increasing demand for raw materials has caused the Journal of Commerce Industrial Commodity Price Index, which includes zinc and rubber, to jump 22 percent in the past year through Jan. 14, topping the highs it reached in 2008 before the September bankruptcy of Lehman Bros. Holdings Inc.

But U.S. companies in aggregate aren't as affected as some foreign countries by the rising prices because they spend far more on wages and worker benefits than they do on commodities, said Zach Pandl, an economist at Nomura Securities International in New York. And their labor costs have been held in check by high unemployment, which has stalled above 9 percent since May 2009.

Companies also can offset rising raw-material prices by increasing worker productivity and cutting other costs, Pandl said.

That's the case at ITT Corp., the White Plains, N.Y., maker of military radios and submersible pumps. The company on Dec. 17 forecast that earnings per share will grow between 7 percent and 12 percent in 2011 on a "significant" rise in profit margins.

"Our expanded productivity initiatives are expected to more than offset increases in commodity prices and wages," Denise Ramos, chief financial officer, told analysts in a conference call.

Corporations also are acting to protect themselves against rising commodity costs by locking in prices through hedges and other buying strategies.