Is Sea Cargo Baltic Dry Index Decline Recessionary?

The Baltic Dry Index (BDI) is in recession territory.  It has been a good friend to pundits who make economic predictions.  Sorry to say, our friend is sick – but there is every reason to believe the illness was caused by forces far beyond a fall in demand.

Global trade contraction is one of the first warning signs of a recession.  The BDI tracts the prices paid for spot shipping contracts to move raw materials (commodities) on 20 specific routes.  It does not measure shipping prices for movements of finished goods.

In theory, all things being equal, this index is a true indicator of the laws of supply and demand.  Less demand, shipping prices fall – more demand, prices rise.  I have spent most of my career involved in international transport, and still continue to receive industry reports and attend marine conferences.  So I have been entertained by “pundits” who misinterpret what is happening.

The best analysis of what is going on with the BDI was published by Bloomberg this past week:

“The biggest problem is that the fleet is continuing to expand like there’s no tomorrow,” said Sverre Svenning, director of research at Fearnley Consultants AS, a unit of Oslo- based shipbroker Astrup Fearnley. “We’ve seen that the imbalance between demand and supply has just kept increasing.”

The fleet of dry-bulk commodity carriers will expand 14 percent this year, compared with a 3 percent gain in seaborne volumes of minerals and grains, according to Clarkson. Yards delivered 146 dry-bulk carriers last month, an all-time high, Svenning said. The IMF cut its 2012 forecast for global economic growth on Jan. 24 to 3.3 percent from 4 percent.

……“I can’t see much happening until March or April 2013,” said Derek Prentis, an 86-year-old shipbroker and consultant who is the Baltic Exchange’s longest-serving member.

To add some context to the Bloomberg article, the following table provides some indication of the expansion of ships types used in the BDI:

in service in build expansion
Bulk Carriers 8833 2707 31%
Cement Carrier 357 9 3%
Gas Carriers 1569 172 11%
Tankers 11232 1187 11%
totals: 21991 4075 19%

What this table cannot tell you is when or why the ships are coming on line.  In many cases, the new build is not because of higher demand – but higher efficiency (hull and propulsion) to reduce costs.  Unfortunately, most of the less efficient ships are not being scrapped but just sold off.  This just adds more tonnage to an already oversupplied market place.

So yes, just a small increase in the supply of ships can make a major difference in a very competitive marketplace.  It makes the BDI an inoperative economic indicator, and one less tool which can be used as an economic metric.

From a different perspective, however, much of the debt from shipping is held by European banks – and if the recession in shipping rates continues, could add significantly more headwinds than a Greek default.

The Econintersect economic forecast for February 2012 was released this week, and continues to indicate a strengthening of economic fundamentals.  This index essentially uses non-monetary measures (counting things) to determine economic growth or contraction.  Many of this index’s components draw on transport industry movements.

Economic News this Week:

ECRI has called a recession.  Their data looks ahead at least 6 months and the bottom line for them is that a recession is a certainty. The size and depth is unknown but the recession was to hit before the end of 1Q2012.  At this point, the chance of a recession based solely on the coincident data is becoming unlikely.

Econintersect‘s February forecast is not recessionary (one month look-ahead). This week ECRI’s WLI index value was -5.2 – a negative value but the best index value since September 2011. This is the third week of index value improvement. This index is indicating the economy six months from today will be weaker.

Initial unemployment claims fell 12,000 to 367,000.  Historically, claims exceeding 400,000 per week usually occur when employment gains are less than the workforce growth, resulting in an increasing unemployment rate (background here and here). The real gauge – the 4 week moving average – fell slightly to 375,750. Because of the noise (week-to-week movements from abnormal events AND the backward revisions to previous weeks releases), the 4-week average remains the reliable gauge.

The data released this week which contains economically intuitive components (forward looking) were positive.   The jobs report (not economically intuitive) was good on the surface, was controversial – but remains the best January in six years.

Weekly Economic Release Scorecard:

January BLS Jobs: Report is good but not as good as first appears
January ISM Non-Manufacturing: Great Improvement
December 2011 Factory Orders: Headlines are up, is it good enough?
Freedom of the Press in America and in China
The Fallacies of Economic and Monetary Policies
How Natural Disasters Affect Currency
Productivity Grows in 4Q2011, No Recession in Sight
Construction Spending Bottoming Process Continued in December 2012
Contrarian Analysis for 2012: Part 3.
Gold Trading: Why We Do Not Swing for the Fence
The Re-reincarnation of Keynesian Economics
Emerging Markets: Decade of Disruption
ISM Manufacturing Looks Good in January 2012
ADP Jobs Growth Disappoints in January 2012, But Still OK
Comparing U.S. and Euro Crises
Holder & Obama Propaganda is “Belied by a Troublesome Little Thing Called Facts”
Will Emerging Markets Fall in 2012?
Are Gold Miners About to Break Out?
November 2011 Case-Shiller Sees Falling Prices in Most Cities
General Improvement in February 2012 Economic Forecast
January 2012 Conference Board Consumer Confidence Well Under Expectations
The Future of the Global Wine Industry
Contrarian Analysis for 2012. Part 2.
On Economists and Psychopaths
An Avalanche of Data This Week
The New Conference Board LEI: First Look
Higher Savings Rate Contributed to Poor PCE Numbers in December 2011
Contrarian Analysis for 2012. Part 1.
Don’t Be A Wall Street Patsy
A Really Bad Plan for Reviving the Housing Market
The Coming Resolution to the European Crisis
Want to Buy What the Hedge Funds Do? Read this First!
A Note from George Orwell with Current Perspective
Trefis Week in Review, 28 January 2012
Robo-signing, Repos and the Shadow Banking System
4Q 2011 GDP: Seriously Mixed Signals

Bankruptcy this Week: Privately-held United Retail Group, Game Trading Technologies, Privately-held Jobson Medical Information Holdings

Bank Failures this Week: None

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