International trade and shipping are inseparable…
In fact, about 90% of international trade goods are transported by sea.
At any given time, more than 50,000 cargo ships of varying sizes are in operation.
Some are docked at ports. Others are under repair at shipyards. But most are in the water – steadily moving toward their destinations.
The image below is from an interactive online map of commercial shipping movements in 2012. In it, each tiny yellow dot represents one cargo vessel. As you can see, it helps show the sheer scale of modern shipping…
And these ships are massive…
A typical ultra-large container vessel (“ULCV”) is about four football fields long. Its beam (or width) is the length of about two basketball courts. And it can be as high as 11 stories from the water.
One of these typical vessels can hold up to a staggering 20,000 20-foot equivalent units (“TEUs”). The largest ones in the world can hold even more.
But not all traded goods are put inside shipping containers…
Resources like grain, fertilizer, oil, iron ore, and coal are loose cargo. These need specialized containers in ships to be transported as bulk cargo. And the ships carrying them are almost as long and wide as ULCVs.
Now, the Baltic Dry Index measures the shipping costs for these kinds of commodities.
It changes depending on demand for goods and the available ship capacity. In other words, the index rises when shipping rates rise on strong demand… and vice versa.
As such, the Baltic Dry Index can be a leading indicator of economic activity. And right now, it’s telling us to keep calm about the state of the global economy…
When the index rises, it’s usually a sign of a stronger global economy. If it falls, it can be a sign of a weak global economy – or even a recession.
Lately, we’ve heard plenty of talk in the financial media about a possible recession in the U.S. and across the globe. And weaker-than-expected U.S. employment data has made these fears worse.
In fact, financial-services titan JPMorgan Chase (JPM) recently hiked the probability of a U.S. and global recession before the end of 2024 from 25% to 35%.
Weaker business activity in other major economies has already led to some interest-rate cuts.
But a look at the Baltic Dry Index shows us that things aren’t as gloomy as they may seem. As you can see in the chart below, the index has been trending up overall since early 2023…
The index is also nowhere near as high as it was in 2021. That was shortly after the world exited the pandemic lockdowns.
Back then, shipping was slow to come back fully on line. That created a temporary supply shortage of cargo vessels.
But this time around, the Baltic Dry Index has been rising… even with the supply of cargo ships operating at a healthy rate. That’s an indicator of a global economy in decent shape.
So if you’re worried about a recession happening soon, don’t be too quick to panic. And don’t assume the Federal Reserve is going to start cutting rates aggressively…
Cutting rates too early or by too much could have the undesired effect of stoking inflation once again. That would make the job of lowering it again much more difficult.
Investors shouldn’t think that rate cuts alone will keep stock prices going up. A healthy, growing economy can achieve that. And the Baltic Dry Index shows us that economic activity isn’t falling off a cliff.
Good investing,
Vic Lederman
