Articles

Commodities Sectors And The Business Cycle
By Geetesh Bhardwaj and Adam Dunsby

Page 3 of 5

While the recession/expansion categorization of the NBER is extremely useful, it suffers from some flaws, including that it only pertains to the United States and that the dates of the turning points are decided well after the fact. Another measure of world economic strength is the OECD composite leading indicators: "The OECD CLI system is based on the growth cycle approach, where business cycles and turning points are measured and identified in the deviation-from-trend series."²

The OECD system of composite leading indicators was developed in the 1970s to provide early signals of turning points of economic activity. The OECD calculates leading indicators for 30 OECD countries as well as major emerging economies. It also provides combined leading indicator indexes for various groups of countries. CLI data is released monthly, reflecting conditions two months prior; historical data is available starting March 1966. In Figure 4, we plot the OECD CLI for OECD countries plus six new emerging markets (Brazil, India, China, Russia, Indonesia and South Africa). The shaded regions show the NBER recession dates. The dips in the index track recessions closely.

OECD Composite Leading Indicators

Figure 5 displays the correlation between the CLI and the monthly commodities sector returns. The sample is broken into the full period and the post-1978 period, the period for which energy returns are available (heating oil starts in December 1978). The correlations are highest (though not huge) for industrial metals and energy. The remaining four sectors form a lower correlation group, with correlations ranging from 0.06 to 0.11.

Correlation of CLI With Monthly Comodity Sector Returns

Correlation of CLI With Monthly Comodity Sector Returns

Taking the information from Figures 1 and 3 as a whole, we categorize industrial metals and energy as procyclical. The categorization of the remaining four sectors is less clear, but given that grains and softs do not post losses during NBER recessions, we categorize them as defensive, and leave livestock and precious metals uncategorized.