The Baltic Exchange's main sea freight index, tracking rates for ships carrying dry bulk commodities, extended its record decline for the 12th straight session on Wednesday due to concerns about demand.
The index, cited as a barometer for the global economy, did collapse during the last two economic downturns. So the index's recent downturn, coupled with the general dismal start of the year on Wall Street, has reignited recession fears for some experts.
The Baltic dry index is down about 98 percent from its peak of 11,793 points in May 2008, marking the lowest level since the records began in 1985, Reuters reported.
The overall index, which gauges the cost of shipping resources including iron ore, cement, grain, coal and fertilizer, fell by 1 point to 290 points. The dry bulk market is expected to remain under pressure for longer because of weak demand for commodities, particularly from top global importer China.
Rather than a measure of global trade, per se, it is merely a gauge of rates to ship dry bulk such as iron ore, wheat and coal that have sunk in price. The index is not an indication of the volume of shipping or trade. China’s shrunken appetite is part of the reason, but so is a building boom in ships.
"This does not though, despite a remarkable amount of panicking over it, mean that global trade has fallen off a cliff. It does not even mean that global trade has contracted at all," Forbes contributor Tim Worstall explains.
"The important point here being, as it is about any other price in the economy, that the price is determined by the interplay of supply and demand, not just demand alone," he said.
"Yes, the Baltic Dry Index has collapsed: but that’s a collapse in the price of shipping, not in the volume of shipping nor of global trade. Far from this being a bad sign for the global economy, it contains within it the seeds of good news. If shipping is becoming cheaper therefore it will be cheaper to trade and there will be more of it. Which is good news, because more trade makes us all richer," he said.
To be sure, it is a bad time to be in the business of “shipping dirt across the world,” as one industry executive told The Wall Street Journal. That is awful news for shareholders of and lenders to shipping companies such as DryShips Inc., Hyundai Merchant Marine and Jinhui Shipping, all trading at distressed levels. But it isn’t an indication of global recession, the Journal reported.
"Trade really is slowing. Bellwethers such as giant port operator DP World to the Association of American Railroads and purchasing-manager indexes world-wide all point to decelerating volume. That bodes poorly for growth, but it is way too early to set alarms ringing outside the transport industry," the Journal explained.
To be sure, Wall Street's nerves have been on edge amid the rocky start to the year.
Growth in the U.S. decelerated to a 0.7 percent annualized rate in the fourth quarter as companies contended with a slower global economy. The median probability for a U.S. recession in the next 12 months jumped to 19 percent in last month’s Bloomberg survey of economists, the highest since February 2013.
“While it’s always possible that a market correction becomes something more significant, we, at Blackstone, do not see a recession in the U.S.," said Stephen Schwarzman, chairman and CEO, Blackstone Group LP. "We do believe that global GDP growth is slowing, and we’ve seen a slowdown within certain sectors and regions in our global portfolio as a result."
Meanwhile, Newsmax Finance Insider Ed Yardeni doesn’t expect a recession and is optimistic long-term, but he expects 2016 to be “choppy and difficult.”
"I admit the risks of recession are increasing, but I’m not looking for multiples to dive into the single digits, which they do in recessions," he told Barron's. "I remain fundamentally optimistic. Last year was choppy and difficult; this year will be choppy and difficult. But the U.S. will come out of this in particularly good stead," he said.
(Newsmax wire services contributed to this report)
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