By Millie Munshi Nov. 3 (Bloomberg) -- A record plunge in commodities may signal the U.S. is headed for the longest recession since 1981, just after Ronald Reagan became president and the economy began a 16-month slump. Industrial raw materials measured by the Journal of Commerce fell at an annual rate of as much as 56 percent last week, the most since 1949 and worse than the declines before every recession since then. Crude oil, copper and wheat tumbled more than 50 percent from records this year as the U.S. economy declined in the third quarter by the most since 2001. ``The industrial sector, which was helping to keep the recession relatively mild, has completely given way and now we need to be prepared for a much more severe recession,'' said Lakshman Achuthan, managing director at the Economic Cycle Research Institute in New York, which compiles the Journal of Commerce data. ``It's at least going to look something like what we saw in the early 1980s, but it could be worse.'' Goldman Sachs Group Inc., once among the biggest commodity proponents, said Oct. 23 the risk of a ``sharp global economic slowdown'' may send prices even lower. Codelco, the world's largest copper miner, said this year's price collapse signals the end of a ``supercycle'' for the metal. The commodity slump is ``indicative of a global growth scenario with slower growth than what we've seen in more recent recessions,'' said Walter ``Bucky'' Hellwig, who manages $30 billion at Morgan Asset Management in Birmingham, Alabama. ``It's probably best to be underweight commodities now. Where the money goes is into defensive holdings, like consumer staples and stocks that benefit from lower commodity prices.'' `Defensive Holdings' Equities outperformed industrial commodities in each of the past three downturns. During the 16-month recession from July 1981 to November 1982, the Dow Jones Industrial Average gained 6.4 percent as the Standard & Poor's GSCI Index of 24 commodities fell 9.9 percent. Then, among the biggest winners in the 30-company Dow index were Wal-Mart Stores Inc., the world's biggest retailer; Pfizer Inc., the biggest drugmaker; General Electric Co.; and Procter & Gamble Co., the biggest consumer-products company. The MSCI World Index of stocks rose 9.8 percent last week, the biggest gain since January 1970, as markets rallied in Russia, Africa, Brazil, Mexico, Europe and the U.S. Not everyone expects a protracted decline in global growth. Federal Reserve Chairman Ben S. Bernanke has been reluctant to label the current slide a recession. The International Monetary Fund forecast on Oct. 8 global growth would drop to 3 percent next year, which the lender calls the dividing line between world recession and expansion. Recession Not Certain ``What you're seeing here is liquidation by hedge funds,'' said Stuart Flerlage, who helps manage $600 million at New York- based NuWave Investment Corp. ``That's a meaningful piece of what's going on out there in the commodity markets, in the equity markets, in the fixed-income markets. You're in a fear cycle now. My overall economic view is it's not as bad as people think.'' The Journal of Commerce Industrial Commodity Price Index measures 18 raw materials, including steel, burlap and plywood. It was started in 1985 by Geoffrey Moore, founder of the ECRI and once a mentor to former Fed chairman Alan Greenspan. Half of the commodities aren't traded on U.S. exchanges. The gauge correctly predicted the past two U.S. recessions, falling about 8 percent from peaks in October 1989 and September 2000. The index dropped about 8.4 percent during the 1990 downturn and 17 percent in 2001. That compares with the 39 percent drop from this year's high on July 14. `Scared to Death' ``People say that copper is the commodity with a Ph.D. in economics, but really all you have to do is look at the price of any commodity right now to realize that the world is definitely in a recession,'' said Michael K. Smith, president of T&K Futures & Options in Port St. Lucie, Florida. ``Anyone paying attention to these markets is scared to death right now.'' Declines in raw-materials prices are linked to manufacturing slumps that compound economic slowdowns. During the eight-month recession that began in March 2001, the Reuters-Jefferies CRB Index of Raw Industrials, a gauge of the cost of 22 items including scrap copper, cotton and hogs, fell 8.7 percent as U.S. industrial production dropped as much as 5.7 percent. The industrial-commodity index fell 19 percent during the recession that began in July 1981, as factory production plunged as much as 7.1 percent. The turn in the U.S. economy may spell trouble for Senator John McCain, who has fallen further behind Illinois Senator Barrack Obama in his bid to succeed President George W. Bush as the financial crisis intensified. Incumbents Lose In the last 60 years, there have been three instances where a presidential election followed a negative third quarter. In two of these, Bush in 2000 and Reagan in 1980, the incumbent party lost the White House. In the third, Dwight D. Eisenhower in 1956, the incumbent party kept the presidency. Bush and McCain are Republicans. While the National Bureau of Economic Research, the Cambridge, Massachusetts-based official arbiter of U.S. economic cycles, has yet to call a recession, the CRB raw-materials index plunged 29 percent since its peak in May. During the same period, U.S. factory production declined three straight months, ending five years of gains. Spending by U.S. consumers dropped the most in four years in September, capping the weakest quarter in three decades, government data show. Unemployment is at a five-year high of 6.1 percent, and U.S. consumer confidence in October dropped to the lowest level on record, according to the Conference Board. Consensus View The commodity decline coupled with economic data signal the current slowdown will last at least 16 months and spur slowdowns globally, not just in the U.S. and Europe, ECRI's Achuthan said. The slumps of 1990 and 2001 lasted eight months, according to NBER data. ``As is usually the case, the commodity index is ahead of consensus right now and indicating just how deep and how long this global recession will be,'' Achuthan said. During the 1982 recession, U.S. gross domestic product declined 2.7 percent in the third quarter, government data show. Economists aren't yet predicting that big of a slowdown. They expect 1.1 percent growth next year, down from 1.6 percent this year and the slowest pace since 2001, according to the median of 75 forecasts in a Bloomberg News survey. In the third quarter, the economy suffered its biggest decline since 2001, contracting 0.3 percent, the Commerce Department said Oct. 30. Commodity producers are curbing output and delaying projects in anticipation of weaker demand. Companies Cut Back Roger Agnelli, chief executive officer of Cia. Vale de Rio Doce, the world's largest iron-ore producer and second-largest for nickel, said the economy is facing ``a very deep recession'' and the company plans to reduce output. Dow Chemical Co. Chief Executive Officer Andrew Liveris said a global recession will prevent the U.S.'s largest chemical maker from meeting its earnings forecast for the lowest point of the industry cycle. Rio Tinto Group Chief Executive Officer Tom Albanese said in an interview yesterday the economic slowdown in China, the world's biggest consumer of metals, was quickening and demand wouldn't rebound until 2009. Investors should sell commodity holdings and buy equities because raw-materials prices will fall further, said John Wilson, a co-director of equity research and chief market technician for Morgan Keegan, which manages $120 billion in Memphis, Tennessee. ``Commodities aren't the place to be any more,'' Wilson said. ``They did outperform equities for some years, but it's difficult to make the case for commodities now until we see the trough of a recession.'' To contact the reporter on this story: Millie Munshi in New York at mmunshi@bloomberg.net.

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