General price indexes frequently anticipate changes in industrial activity. A glance at the comparative chart showing the movement of Bradstreet's price index and the index of manufacturing production will demonstrate this fact.
As a rule, business activity moves as prices do. That is the general tendency. There are some exceptions, as in 1926 and in 1928, when industrial activity increased for considerable periods while commodity prices were gradually declining (see Fig. 3); but the general relationship is a logical one. Rising prices indicate that the demand for commodities is strong in comparison with the supply. They tend to cause increased profits, and that tends to stimulate production. They have their effect upon sentiment. Conversely, falling prices work in the opposite direction. It will be found that a majority of price declines in a list of commodities such as that published weekly by Dun's rather frequently accompanies the development of bearish sentiment and often shortly precedes a recession in the stock market.
History shows that business recessions are almost always preceded by declines in commodity-price indexes, particularly the more sensitive ones such as Bradstreet's (cf. Figs. 2 and 3). This rule may be considered a general one. It does not follow that price declines always forecast recessions; but although as much as a year may elapse, recessions in business generally do come sooner or later after a period of declining prices. The severe recession of 1929-1930 was intensified by the low profit margins which prevailed at its beginning, owing to the fact that prices had declined from 1928 on.