HedgeTalk: Unemployment’s Impact on Commodity Prices
By: John Trefethen, Director & Co-Founder
The US economy is largely dependent on consumer spending. Until the labor market improves significantly, uncertainty and volatility will exist with commodity prices. The good news is that applications for unemployment insurance fell for the eighth straight week as shown in the graph below:
The bad news is that the number of workers seeking assistance remains about 10-times higher than before coronavirus lockdowns began in March. This suggests that, while the pace of layoffs is slowing, workers are struggling to find new employment. This also suggests suppressed commodity prices for the foreseeable future. While the US makes up less than 5% of the world population, it consumes a much greater per capita percentage of raw materials. Per a study commissioned by the Sierra Club, the US consumes the following percentages of the world’s commodities listed below:
Because of America’s significant consumption of the world’s raw materials, a high unemployment rate in the US suppresses demand for these raw materials. The result is a positive correlation between the US unemployment rate and global commodity prices. Below is a graph that displays the S&P Goldman Sachs Commodity Index (S&P GSCI) for 2020. The S&P GSCI is a composite index of 24 commodities and the most widely recognized commodity benchmark.
The correlation between a high unemployment rate and lower commodity prices is evident, and something that commodity buyers and sellers need to consider in their buying and selling activity. Employing a hedging strategy that uses exchange traded and/or over-the-counter derivatives can preserve margin for those active in commodity markets, and something that should be considered by anyone actively participating in any of the commodity markets.