The recent drop in commodity prices and its implications for the US economy are discussed here.
The drop that has occurred in commodity prices has come about, especially for oil. Commodities, as per definition, are basic goods that are usually sold in large volumes. The oil commodity is a fine example, whose price decline has resulted in gas prices plunging which has been good for the drivers. However, it is not only oil that has been subjected to falling prices, but other commodities as well. That leads to implications for the economy in a broader sense.
The Wall Street experts state that there is something out of the ordinary in the situation. The commodity prices had been rising steadily from the late nineties till 2008 as there was a lot of demand coming from emerging markets including China. Prices have taken a different trend in the past five years. The indices that track the commodity prices of different categories show that, cattle, oil, cotton and other diverse commodities have been on the decline and the speed of the decline has increased in the last few months.
This leads to new insight in the supply and demand scenario in the economy. As per economic principles, commodity prices usually increase as the economies around the world keep growing. If the prices are dropping fast, what does it signify? Here it means that industrial demand that exists for the different commodities like minerals, energy and commodities is on the downhill. It is a sign that the global economy is slowing down and the rate is a fast one. This is coming at a time when the governments are in debt and hence, recovery from 2008’s recession has not been complete. Federal Reserve and other central banks offer rates that are close to zero and hence, there are no other forms of stimuli that they can inject into the economy.
Many wonder how this global slowing down has come about with China playing a role in it. This is a large economy that has a role to play in the global scenario. It is right now in a state of transition. At the time when the recession came around, the economy made a large amount of investments, but that is in a state of change now. This economy is also slowing down and its size makes an impact on the global economy. It is currently trying to move from an industrial to a service economy. That has translated into less demand for commodities. The pace of growth has started to slow down in this economy, which is reducing demand for items that come in from countries like Canada, Africa or Australia.
As a result, the whole world is feeling the slowdown effect. Even if the commodity prices falling might be seen as a plus, with oil prices falling, the banks will see bad loans coming in and that will spell trouble for the US economy, a similar situation as the 2008 scenario. For more articles on US economy, Explore this Link – How Small Business Powers the US Economy?