The Most Important Economic Indicator You’ve Never Heard Of

The Most Important Economic Indicator Youve Never Heard Of

Those bullish on global economic recovery have their data points: the steady
upward climb of world stock markets, three straight months of Chinese
manufacturing expansion, the weak dollar. But there are still plenty of
skeptics of a rapid and robust turnaround, with their own set of numbers to
cite: continued bleeding of private-sector jobs in the US and Europe, more
record lows in new home construction, and, er, the weak dollar.

Never before have so many experts and ordinary folk been so busy trying to
gauge the timing and strength of the eventual worldwide economic rebound.
One of the best indicators is found in the shipping industry. It’s global in
scope and ever more indispensable in an economy so reliant on international
commerce. Not surprisingly, perhaps, there is new evidence out
on the open seas that both the bears and bulls can flag to help make their
respective case.

The Baltic Dry Index is the worldwide benchmark
for shipping rates of raw materials, and it has registered some eye-popping
gains over the past month. The London-based index registered its 23rd
straight daily gain on Wednesday, closing at 4,291, its highest mark since
September and the longest streak of gains since July 2006. Daily rates for
the largest capsize ships, which typically carry iron ore, rose 6.8% on
Wednesday to $93,197. Just five months ago, daily ship rental rates were
hovering just above $2,000, about the price of a great seat on opening day at
the new Yankee Stadium.

Baltic Index president Jeremy Penn cautions that shipping rates can
sometimes fluctuate dramatically, and are often driven by specific factors
such as carrier availability in key locations. Indeed the current boost is
best explained by Chinese steel production demand and a shortage of the
capsize vessels to haul the iron ore. Penn notes that it is not yet clear
whether the core manufacturing that is turning again in China is linked to
coming export demand or domestic infrastructure investment. “There are
always quirks in the pricing,” he notes.”And at the moment it seems a very
China-centric market.”

Still, there is inevitably a global dimension to tracking bulk rates. “It’s
the price for moving raw materials, which sit at beginning of the production
chain,” Penn explains. “We can say that the complete lock-up of world trade
we saw at the end of last year has eased considerably.” Penn concludes that
his index “is useful to look at, but it’s not the Holy Grail.”

That’s to say, before you run out to start an import-export business, take a
look at some other numbers in the shipping world that are far less robust.
Shipping by container, typically finished goods, remains troublingly cheap,
a sign that consumer products are still not flowing between continents. The
price for a 20-foot container on a Far East-to-Europe voyage is reportedly
currently maxing out at a paltry $500. Though the pace of the drop in rates
has slowed, there are signs that charter prices have still not bottomed out,
having dipped below the record lows of the 2002 stock market crunch.
According to London ship broker Clarkson, a 3,500-TEU gearless Panamax
vessel—the largest vessel that can go through the Panama Canal—pulls in
$6,500 a day, down 34% on the $9,500 it was charging in February.

One shipping industry insider notes that any evaluation of transport prices
must include not only demand , but
also supply . The steady boom of world
trade over the past decade prompted a major spree of ship building, with
many vessels slated for completion in the coming months and years. “There
are new and larger ships on order,” notes the source. “I fear that overall
rates will not be as responsive to the recovery as a whole.” In other words,
just as skyrocketing prices in raw material transport doesn’t guarantee a
robust global recovery, nor would a sluggish rebound in shipping profits
preclude a bullish outlook on the overall economy.

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