Commodity Price Uncertainty as a Leading Indicator of Economic Activity

In this paper we examine the impact of commodity price uncertainty on US economic activity. Our empirical analysis indicates that uncertainty in agricultural, energy and metals markets depresses US economic activity and acts as an early warning signal for US recessions. Our VAR analysis shows that uncertainty shocks in agricultural and metals markets have a more long-lasting dampening effect on US economic activity and its components, when compared to the effect of oil price uncertainty shocks. Finally, we show that when accounting for the effects of macroeconomic and monetary factors, the negative dynamic response of economic activity to agricultural and metals price uncertainty shocks remains unaltered, while the respective macroeconomic response to energy uncertainty shocks is significantly reduced due to either systematic policy reactions or random shocks in monetary policy.