The Shipping Blues

How will we know when the economy is in a recession? It will not be a slide in the Dow, and it probably won't be another weak report on housing or employment.

By one little known measure - the Baltic Exchange Dry Index - we may already be there.

The index is an indicator for economic growth because it tracks vessels carrying basic commodities like iron ore, coal, and grain on 22 major shipping routes.

Today, the index fell 6.41 percent, to 6,472 on the Baltic Exchange in London, its steepest fall ever and the fourth big decline this week.

The index was trading near 11,000 in mid-November, as demand for commodities boomed, driven by China's ferocious industrialization.

But if American consumers and businesses are not buying goods, then China and other producers will throttle down their production. And that's what makes the Baltic dry index, created in 1985, so useful.

As Daniel Gross wrote on Slate in 2003, the index "doesn't deal with container ships carrying finished goods. It deals with the precursors to production: bulk carriers carrying building materials, cement, grain, coal, and iron."

"People don't book freighters unless they have cargo to move," he noted.

The Bespoke Investment Group adds a caveat on the Seeking Alpha Web site: The recent slide is the ninth time the Baltic index has fallen 35 percent or more since 1985. But there have been only two recessions during that period.

The index represents how much it costs to transport various bulk cargoes on a per tonne and daily hire basis, based on estimates made daily by leading ship brokers around the world. It is a composite of four indexes according to the size of the cargo ship: the Capesize Index , the Panamax Index, the Supramax Index and the Handysize index. (Capesize is the biggest; these are ships that can't navigate the Panama or Suez canals and must travel around the capes.)

The index is "dry" because it isn' wet - or, in other words, it does not measure the transportation of oil or gasoline (the Baltic Exchange has indexes for that, too.)

And why Baltic? The exchange like other London markets, including Lloyd's, had it roots in a coffee shop. The exchange traces its birth in 1744 to the Virginia and Baltick Coffee House on Threadneedle Street, where sea captains and merchants met to talk shop.

Jeffrey Cane