My Road Warrior travels took me to Springfield, IL, to address the Community Bankers Association’s Ag Conference. This year Matt Roberts of Ohio State University and I scanned the audience and discovered a much younger group than usual, with many of the bankers under 35 years of age.
This year my focus was on some of the lead and lag economic indicators that can predict the direction of the U.S. and global economies. One of the business loan officers attending followed up with an e-mail to me that stated he heard some great information, but how will it impact his customers’ operations? Let’s address this.
The leading economic index (LEI) and purchasing manager index (PMI) are still quite strong in a positive direction, which is indicative of economic growth. The LEI increased in May and the diffusion index – the 10 factors making up the LEI – is 50%, meaning half of the 10 factors are positive. If this positive trend should continue over the next two to three months, it may indicate that the U.S. economy is heading toward a slow growth scenario, but there is still some chance of a double dip recession. Only time will tell. This in turn could mean slow economic growth in the U.S., which may reduce growth expectations in the BRIC nations of Brazil, Russia India and China. This group is 18% of the world economy and 47% of last year’s economic growth was from these nations. These emerging nations have shown robust growth for commodities like corn, soybeans, oil, and steel, which could have a direct link to profits and cash flow for producers. It will be important to watch economic growth of the U.S. and the BRIC nations in the next 12 months.
Core inflation, which excludes food and energy, is barely below 1%. Headline inflation, which includes food and energy, is approximately 2%. If unemployment stays close to 10% and U.S. economic growth is below 3%, then the Federal Reserve will continue their stance of no interest rate change, which is very important to those with operating and term debt.
Globally, watch China and Europe. If China’s growth in gross domestic product (GDP) remains above 9%, expect strong demand for commodities. If the growth is below 3%, this would most likely result in a large drop in commodity prices. The Euro sector is struggling with slow and no growth and sovereign debt issues. This has resulted in volatility in the U.S. and world equity markets. The more volatility and wide swings in stocks, the more land purchases are seen as a safe haven for many in agricultural and rural areas, and investors. This holds a floor on land values and cash rents.
Major headwinds to economic growth in the U.S. and developed world economies are housing starts, factory capacity utilization and unemployment, as well as U.S. sovereign debt levels. These indicators, which are all showing negative trends, will illustrate which direction the U.S. economy is headed in the second decade of this century. Slow growth appears to be the most likely scenario.
Editor’s note: Dave Kohl, Corn & Soybean Digest trends editor, is an ag economist specializing in business management and ag finance. He recently retired from Virginia Tech, but continues to conduct applied research and travel extensively in the U.S. and Canada, teaching ag and banking seminars and speaking to producer and agribusiness groups. He can be reached at [email protected]