Global Real Assets

A bi-weekly discussion of the recent commodity, REIT, and real asset markets and what it may mean for investors.

October 20, 2016

John LaForge, Head of Real Asset Strategy

Dr. Copper—M.D. or Ph.D.?

  • Copper prices have done an OK job at predicting recessions.

What it may mean for investors

  • We do not believe that the 54 percent decline in copper prices, since 2011 implies that a U.S. recession is imminent.

Copper has a nickname in financial circles. If you haven’t heard it—it’s “Dr. Copper.” Copper gets this infamous moniker because it is believed that copper prices are a good gauge for the health of the U.S. economy. Falling copper prices, in particular, are widely believed to help predict domestic recessions. As copper prices now have declined nearly 54 percent from their 2011 peaks, some believe that copper may be predicting an upcoming recession. We doubt that copper is predicting an imminent recession. As you soon will see, copper has not been perfect at calling past recessions.

Copper Has Not Been Great at Predicting Recessions

  • Question: Can copper help predict recessions?
  • Answer: Yes. But we are not convinced that copper deserves an M.D.; instead, a Ph.D. in economics.

In the past 36 years, the U.S. has been embroiled in five recessions (1980, 1981, 1990, 2001, and 2007). Copper prices started to fall ahead of three of these recessions (1981, 2001, and 2007). In other words, copper helped to predict three of the past five recessions. While this is not a bad record, we are not convinced that a 60 percent (3/5) success rate deserves the coveted medical designation, M.D. Maybe a more appropriate designation would be a PhD in economics—as copper’s great predictability is more theory than fact (no offense to the fine PhD economists out there). Chart 1 highlights the price of copper around each of the past five recessions. The shaded areas represent the recessions during each time period. The bottom scale is in months, to help us better understand how long each recession lasted in months.

Copper May Be a Better Recession Predictor than the National Bureau of Economic Research (NBER)

We would also like to draw your attention to a small red arrow placed inside each clip. The arrow represents the time that recession was officially declared by the NBER. The NBER is an official “caller” of U.S. recessions. Chart 1 shows that the NBER has been relatively “late to the party” for the past five recessions. By the time the NBER had declared each of these past recessions, the recessions were well on their way to being over. Versus the NBER, Dr. Copper does look like a genius.

Chart 1. The Price of Copper Around RecessionsChart 1. The Price of Copper Around RecessionsMonths Prior to and Following Recession (Zero marks beginning of recession).
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