The Unvarnished Truth: White Paint Can Serve As A Useful Indicator Of Economic Activity

Some gray-haired types like to give the impression that they’ve seen it all when it comes to how the financial world works. I, on the other hand, freely admit that there are plenty of things I don’t know about economics and markets (and, that at least some of what I do know is the result of the many boneheaded mistakes I’ve made previously). The latest case in point: my ignorance of the fact that the market for titanium dioxide can serve as a useful barometer of overall economic activity. In “Paint Chemical Price Drop Signals Broader Weakness,” the Associated Press notes that the current price trend of this important commodity — which I’ve not really heard of before now - reveals what might be described as the unvarnished truth about how our economy is really doing.

When price of ingredient in white paint falls, economists see weakness in housing, economy

The price of a key ingredient in white paint fell in April, signaling another drop-off in home construction and renovation activity, and hinting at more economic weakness ahead.

Titanium dioxide prices fell 0.8 percent from March, the Labor Department reported Thursday, bringing the decline over the last 12 months to 5.7 percent.

Economists track titanium dioxide as a barometer of the country’s overall financial health. When people are building homes, remodeling, redecorating or even getting a house ready to sell, they buy paint. About 419 million gallons of paint were sold last year, and more than a third of it was white.

“It is basically telling us construction, remodeling, homes for sale and manufacturing were down,” said John Silvia, chief economist at Wachovia.

It also underscores problems in manufacturing linked to autos and housing-related goods, economists said. Those industries have been hard hit by the recession, now the longest since World War II, as consumers and businesses have reined in spending.

“Autos and a lot of equipment that goes into cars uses some variant of white paint. So do a lot of appliances and consumer electronics,” said Mark Zandi, chief economist at Moody’s Economy.com.

Zandi, Silvia and other analysts said the white paint index was consistent with their belief that the economy is still shrinking in the April-June quarter. However, they predict the rate of decline will be about 3 percent — half the pace seen in the prior two quarters, the worst six-month performance in 50 years. The expected improvement would largely come from businesses making less severe spending cuts, analysts said.

Federal Reserve Chairman Ben Bernanke has said the recession will end this year, with the economy starting to grow again later this year.

Last week, evidence mounted that the worst of the recession was over. Employers cut the fewest jobs in six months, home sales firmed up, construction rose and some big retailers fared better.

This week, though, government reports showed that retail sales fell in April and new applications for unemployment benefits rose sharply, challenging hopes that a recovery was in sight.

Even if the economy starts to recover, it will be slow and that’s likely to tamp down price increases for raw materials, including titanium dioxide.

The titanium dioxide index is volatile and thus should be viewed with some caution. The price, which is not seasonally adjusted, has fallen in six of the last 12 months.

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