US Economic Recovery Might Get Derailed Due to Commodity Slump

As I have written earlier, oil is a commodity. It may seem like its own class of asset but it is still a commodity. Accordingly, the dynamics surrounding oil also affects other commodities. One of the key market dynamics putting downward pressure on the global price of oil is weakening demand from Europe, China, and elsewhere. The only bright spot in the global economic scene currently is the United States which is enjoying continued recovery. While we can debate until the cows come home regarding how ‘solid’ the US’ recovery is, it’s jobless figures do show a sustained uptick. Since the US is the only major economy enjoying a growing economy. Unfortunately, it might not be big enough to soak up excess production of commodities. This is what’s at play with the recent declines of materials stocks like Freeport McMoran.

The downward pressure on materials company should make economic planners and industry observers as well as investors worried. It means the contagion of oil is spreading to other industries. We’re not just talking about declining stock prices here. This is going to be a Main Street issue besides a Wall Street one. How? Jobs. For every day oil prices are depressed, shale oil drillers would have to rethink plans of hiring new people. In fact, they might even think of letting go of people. The same is now happening with materials companies. These industries might face waves of layoffs that might send shockwaves to the rest of the economy.

The US’ jobs recovery, as flawed as it already is due to the fact that it tends to lean more heavily on lower-paying service jobs, might be in danger. Once the US economy is weakened, this throws the whole global economy in disarray because there is no other economy that is strong enough to pick up the slack. Keep your eyes peeled on commodity pricing in the next few quarters. They might give us a glimpse of the challenges up ahead.