Benzinga: Drop in Worldwide Shipping Rate Might Predict Recession

By Michael Kling

Does the recent plummet in worldwide shipping foreshadow a coming recession? After all, a plunge in the Baltic Dry Shipping Index (BDI) in late 2008 was followed by the Great Recession.

Whether or a not the drop in global shipping this year points to a recession depends on who you ask.

Created by the London-based Baltic Exchange, the index measures changes in the cost to transport materials by sea. It’s also seen as a key macroeconomic indicator. More demand for shipping equals higher shipping costs, a sign of economic strength.

“To those who would use the index for macroeconomic forecasting, a drop from above 1,500 in late March to its current level at 970 could be worrisome,” warns Jake L’Ecuyer of Benzinga news and analysis service, adding that the drop “provides more fundamental weakness to this market.”

The index, which roughly predicted movements of the S&P 500 in the last year, is largely accurate.

A disappointing New York Empire State Manufacturing Index report of 1.29, far below the expected 8.0 as well as its previous 5.61, isn’t a good sign either, he adds.

A drop in global shipping might indicate deflation, a devastating economic scenario, warns the International Business Times. If prices start falling, consumers would be disinclined to spend and companies would be less likely to invest and hire, a disastrous situation that Japan suffered through for decades.

Still, many experts remain optimistic.

“Deflation fears have spiked up again, but we think that’s yesterday’s risk,” UBS strategist Nick Nelson states in a research note, according to the Times.

“As a whole, the BDI as a predictor of global macroeconomic conditions is likely overstated,” JP Morgan analyst Nishan Mani tells the Times. “Underlying commodity demand and consequently emerging market growth could be strong in conjunction with a weaker BDI.”

Although its 53 percent drop since January raises concerns, the index can be volatile, typically dropping in January and February due to seasonal factors, such as New Year holidays in China and tropical cyclones in Australia, explains Douglas Mavrinac, managing director of equity research at Jefferies LLC Maritime Group.

The unusual drop in March could be attributed to production problems in Brazil.

China’s slowing economy is a major factor. The Chinese are importing smaller amounts of commodities like iron ore, but the trend could reverse as commodity prices fall. Chinese producers will stop producing if iron ore prices fall too low, prompting China to import more ore and increasing the global shipping.