What one indicator is saying about the global economy

07/19/2010 12:59 pm EST

Focus: STOCKS

Jim Jubak

Founder and Editor, JubakPicks.com

A bottom with no near-term upside catalyst.

I'm afraid that fits the global economy, the U.S. stock market, and the Baltic Dry Index.

The Baltic Dry Index, a widely followed, but very volatile, indicator of global economic activity, is showing signs that it bottomed last week. On Friday, Oppenheimer reports, the index moved up for the first time since late May.

The index tracks the daily prices for shipping cargoes of raw materials such as rice, coal, grain, and iron ore on 26 routes using a weighting that accounts for ship size and the percentage of dry bulk traffic that class of ship represents. Since shipping costs move up and down in anticipation of the shipping needs of commodity producers ad consumers, the index gives an indicator of the volume of global trade and thus of the state of the global economy.

The index had been in a strong rally off the bottom--set in the days when the global economy seemed to be shrinking by the moment. But that rally peaked on May 26 at 4209. Since then the index had dropped daily to close at 1700 on July 15. That’s a drop of 60% from May 26. (I said this index was volatile, didn’t I?)

The losing streak that ended on July 15 was the longest in almost 15 years.

The index actually climbed on July 16, however, and while one day and one 1.2% gain in the index, doesn’t make a trend, I think we’re likely to see the index stabilize here. Iron ore prices, for example, have dropped for three consecutive months on worries about falling Chinese demand.

But I wouldn’t get too giddy here. While the index may have stabilized, I don’t see much signs of a catalyst that would lead to a strong upturn from here.

It’s likely that the index is stabilizing because at current shipping rates some ship owners are simply withdrawing their vessels from the market. Speculation says that a few owners have started to look to anchor ships in Singapore, for example. Removing ships from the market would stabilize prices, but it’s sure not an indicator of an impending upturn.

But it’s also likely that the Baltic Dry Index will lag the global economy in the coming months. The price of shipping isn’t just a function of global demand but also of the supply of ships and the total bulk fleet is forecast to grow by 16% in 2010 as ships that were ordered in boom times are delivered. That will keep shipping prices under pressure no matter what the global economy does.

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