Lumber and Copper Prices are Diverging – Which is Signal and Which is Noise?April 12, 2019
The tale from some of the most cyclical and predictive economic indicators are telling investors two very different things at the moment. Copper, the metal with a PhD in economics is giving us the all-clear sign while lumber, which is perhaps only regarded as having a master’s or bachelor’s in economics, is saying, “be careful.”
Both indicators can’t be right, so which is actually the most useful in telegraphing economic activity? From my perspective, it’s lumber, despite its rather lesser educational attainment. The reasoning is simple. Lumber has a leading relationship with leading indicators of economic activity while copper has a coincident relationship with leading indicators of growth. Yes, you read that right: lumber prices are a leading indicator of a leading indicator, and the data bears it out.
In the second and third charts below I plot the lumber and copper prices, respectively, against the ISM new manufacturing orders series. ISM new manufacturing orders are regarded as one of the best and most consistent indicators of economic activity over the next quarter or so. Lumber prices lead the ISM new manufacturing orders series by three months while copper prices act coincidentally.
Therefore, the message from lumber should be paid attention to. It’s currently telling us that ISM new manufacturing orders will peak in May and then struggle through at least July. But we also need to be vigilant to see where lumber prices move next. A break below levels of last Fall would be undoubtedly bearish for the economy and stocks too while a reversal right here could paint a more benign picture. As Tiger Woods is famous for saying, “expect the best, but prepare for the worst.” Indeed.