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What Falling Milk Prices Say About an Economic Slowdown

By Jeff Cox, Senior Writer

NEW YORK ( CNBC) -- The decline of milk prices this year has been a welcome development for consumers pressured by $4 a gallon gas, but could be a bad sign for the economy.

Falling milk prices--particularly over the past decade--have been a warning signal for a slowdown, while rising prices have accompanied upturns in the economy, according to research from Nicholas Colas, chief market strategist at ConvergEx in New York.

"That's good news for this high-profile consumer good and its effect on inflationary expectations," Colas said. "At the same time, milk prices have been cyclical since the Great Depression. The pullback in 2012 could therefore be a useful early warning sign about a slowing U.S., and global, recovery."

Prices pulled back during the recessions of 2002-03 and 2009, while they surged in 2001, 2004, 2007 and 2011.

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More recently, milk has been on a slow but steady decline since reaching a historical peak in September, falling nearly 4% at the supermarket and nearly 25% in recent days at the distributor level.

The current price of $3.86 a gallon is still high by historical levels, but drifting lower as demand fades.

The milk futures contract has risen 6% over the past month a half, but the American Restaurant Association expects that to fade due to a larger than expected milk cow herd.

"A more sluggish domestic economy is always bad for milk prices, so we have to treat the recent pullback as a warning sign about the national economy," Colas said. "Moreover, exports of milk products were an estimated 13% of production, which means weaker prices may also be a sign of diminished demand in global markets."

Other indicators are confirming what milk is showing, though consumer prices broadly are up 2.7% over the past year.

The Chicago Federal Reserve's National Activity Index, though not one of the market's more widely followed barometers, nevertheless posted a minus-0.29 Thursday, indicating economic contraction.

"An index reading of less than zero depicts an economy growing at below trend and easing pressures on future inflation," said Andrew Wilkinson, chief economic strategist at Miller Tabak in New York. "That is a positive development set against the higher inflation projections at Wednesday's (Federal Reserve) meeting although no one wants to see growth tapering off."

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