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A puzzling and precipitous divergence

Its been a few months of good (or rather better) news on the employment front – the employment situation being a lagging indicator implies that the economy is on the mend and has been so for a few months. So what is the divergence then? See here below:

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This is the Baltic Dry Index (BDI). You can see the steady build up that kicks off in August 2011 and continues till about Nov 2011. After that, it drops precipitously going into 2012. Now isn’t that a puzzling divergence? Well, it isn’t if you think that the general economy is going to tank again but can you really say that with today’s picture, today’s expectation – rosy getting rosier?

Well, at the very least I get to check whether the BDI is any good as an indicator?

Revisiting the Baltic Dry Index

Periodically, I revisit the Baltic Dry Index (BDI) from time to time to get a read on economic activity as read from the volume of shipping contracted across the world. The following is a 3-year chart from 2009 onwards.

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As you can see, the stimulus lead spurt of activity also reflected in the economy starting in early 2009 that began to peter out at the beginning of 2011. Then starting from August 2011, the index records a slight improvement in activity but nothing to write home about. While it is early to rule in an oncoming recession, it would take only the slightest worsening of the crisis in Europe to send all the economies of the world reeling once again.

No good news here. But as long as there’s no terrible news either, we slink on.

Ready for a recession?

Are you ready for the coming Recession? “Why, when did the last one end”, you may ask me. And the truth is that it never ended. The below chart captures it quite well – this is a 1 year chart of the Baltic Dry Index (never heard of it? Well, now you have)

 

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The Baltic Dry Index is best described as (Baltic Dry Index: BALDRY):

The Baltic Dry Index is a daily average of prices to ship raw materials. It represents the cost paid by an end customer to have a shipping company transport raw materials across seas on the Baltic Exchange, the global marketplace for brokering shipping contracts.

and

The BDI is one of the purest leading indicators of economic activity. It measures the demand to move raw materials and precursors to production, as well as the supply of ships available to move this cargo. Consumer spending and other economic indicators are backward looking, meaning they examine what has already occurred. The BDI offers a real time glimpse at global raw material and infrastructure demand. Unlike stock and commodities markets, the Baltic Dry Index is totally devoid of speculative players. The trading is limited only to the member companies, and the only relevant parties securing contracts are those who have actual cargo to move and those who have the ships to move it.

 

However, if you want to place in context the fluff about the US (or World) economy floated by your “favorite” news agency or administration spokesman – just pull up the 5 year chart of the Baltic Dry Index.

 

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The aftermath of the Great Recession and consequent efforts to revive the US (and worldwide) economy is reflected in the period of mid-2009 to mid-2011. All that stimulus and confidence measures have largely achieved naught.

If the Baltic Dry Index meanders at the bottom of the chart above on a go forward basis – then there is a great likelihood that the Great Recession from 2009 will resume with all its consequent effects.

Sorry folks – this is terrible news but forewarned is forearmed.

About me

I am Chris Jacob Abraham and I live, work and blog from Newburgh, New York. I work for IBM as a Senior consultant in the Fab PowerOps group that works around the issue of detailed Fab (semiconductor fab) level scheduling on a continual basis. My erstwhile company ILOG was recently acquired by IBM and I've joined the Industry Solutions Group there.

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