In honor of the passing of “The Maestro”, a brief note on the most useful economic indicator…
Our colleague, Senior Advisor Phil Cannistraro, worked directly with Alan Greenspan in the 1980s immediately prior to Greenspan joining the Fed. Earlier today, Phil shared the following about Greenspan’s skill and personality.
“He was truly an economist’s economist. Greenspan was dedicated to his craft, spending extensive time on research. In an era with very little data, he was a pioneer in collecting and analyzing “alternative data”, always willing to dig as deep as possible to uncover the implications for the economy. Despite his significant reputation, he was always genuine and humble.”
Back in 2005, there was a lot of debate over economic growth (GDP was slowing at the time). Phil and I put together a note for our Japanese business partners who revered Greenspan. Quoting from that research note:
Phil walked into his office and asked the following question:
“If you were stuck on an island with only one piece of economic data, what would you ask to see?” Greenspan’s response, based on years of careful study of economics and markets, was to review the prices for scrap metal. We refer to this indicator as “The ag Indicator” in honor of Alan (a) Greenspan (g).
According to Phil, Greenspan thought scrap metal prices were the most useful economic indicator as they were very sensitive to rising demand. Our work at the time showed that scrap metal prices did have a strong association with economic growth and sometimes inflation.
Does it Still Apply?
In Greenspan’s day, he built a network of contacts to obtain pricing information. Today, the U.S. Producer Price Index includes components for scrap metal prices and the London Metal Exchange trades a contract based on scrap metal prices. Generally speaking, scrap prices are up a lot this year, though down in recent weeks. Some of this is no doubt highly related to the AI/energy buildout and may not be representing the overall economy. Still, current scrap price trends are consistent with a strong economy and some inflation, even though a lot of growth may be derived from AI. Could recent weakness in scrap metal pricing be coincident with concerns over cost of AI, and whether or not an overbuild is emerging? This might be forcing the narrative a bit, but scrap metal pricing is still a useful indicator.
Among his many talents and turns of phrase, Greenspan was an expert at identifying and analyzing data sets to discern the path of the economy. Today, we adhere to this approach, seeking as much useful data as we can while also recognizing the need for experienced interpretation.
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