March 2009 NationalEconomicTrends Views expressed do not necessarily reflect official positions of the Federal Reserve System. T he Baltic Dry Index (BDI) is an index published daily by the Baltic Exchange in London, the leading global marketplace for brokering shipping contracts. Exchange members include companies from the international bulk-shipping industry, shipbrokers, freight derivative brokers, trading houses, shipowners, and other cargo interests. 1 Every day, the Baltic Exchange asks brokers around the world the cost of booking cargo of various sizes to move raw materials across various ocean routes. The exchange uses this information to compute the BDI—an indicator of maritime transportation costs for major raw materials. The BDI has generated interest as a leading indicator of economic activity because manufacturers increase their demand for raw materials to meet expected increases in the demand for finished products. 2 Likewise, a slowdown in economic activity reduces the demand for raw materials when manufacturers detect increases in unsold inventory. The BDI can be viewed as the equilibrium price of shipping raw materials, determined by the supply of cargo ships and the demand for transporting raw materials by ship. First, the supply of cargo ships is inelastic relative to demand because cargo ships are costly and time- consuming to build. In contrast, companies can simply stop booking cargo ships when demand drops. Second, the index is sensitive to changes in the price of crude oil. Fuel and port- related charges are significantly large components of the total cost of maritime shipping. 3 Although port-related expenses such as dockage charges are relatively stable, oil prices are notoriously volatile. As a result, the BDI is sensitive to changes in the demand for raw materials and oil price changes. Movements in the BDI can be traced to changes in global demand for manufactured goods. In addition, this demand affects the price of crude oil, which in turn affects the cost of maritime shipping. Between January 2006 and October 2007, the BDI increased more than 400 percent, from 2,081 to 10,656 points (see chart). This steady rise was largely due to the signifi- cant growth in the global economy for manufactured products. The growth rate of total industrial production (excluding con- struction) for member countries of the Organisation for Economic Co-operation and Development (OECD) and six major non- members (Brazil, China, India, Indonesia, Russia, and South Africa) was more than 6 percent per annum from March 2006 to October 2007. Movements in this data series closely mirror the (lower) growth rate of industrial production of manufactured goods in the United States. Such high growth rates of industrial production around the world are likely to have also contributed to a surge in crude oil prices, which increased from $67 per barrel to $95 per barrel during the same period, thereby exacer- bating the rise in the BDI. However, the index declined sharply to 6,052 points by late January 2008, only to rise again, this time reaching an all-time high of 11,440 points in June 2008. The growth in industrial pro- duction had slowed only marginally over this period. The increase in the BDI could be attributed to the surge in crude oil prices, which had increased by more than 52 percent in the first five months of 2008 to $140 per barrel at the end of June. However, a sharp slowdown in the growth rate of industrial production worldwide, and the consequent decline in oil prices, contributed to a precipitous decline in the BDI. As of November 31, 2008, the index was at 715 points, its lowest level since January 1987. —Rajdeep Sengupta and Yu Man Tam 1 From the Baltic Exchange; www.balticexchange.com. 2 Gross, Daniel. “The Best Economic Indicator You’ve Never Heard Of.” Slate, October 24, 2003; www.slate.com/id/2090303/. 3 Rodrigue, Jean-Paul; Corntois, Claude and Slack, Brian. The Geography of Transport Systems. New York: Routledge, 2006. research.stlouisfed.org Recent Movements in the Baltic Dry Index 0 2,000 4,000 6,000 8,000 10,000 Jan-06 Jul-06 Jan-07 Jul-07 Jan-08 Jul-08 –10 –8 –6 –4 –2 0 2 4 6 8 10 Baltic Dry Index (left scale) Industrial Production: U.S. Manufacturing (seasonally adjusted, 2002 = 100, year-over-year % change) OECD + 6 Major Non-members: Composite Leading Indicators Total Industrials Excluding Construction (seasonally adjusted, 2000 = 100, year-over-year % change) Baltic Dry Index 12,000 Percent BDI and Global Demand for Manufactured Goods
Transcript
March 2009NationalEconomicTrends
Views expressed do not necessarily reflect official positions of the Federal Reserve System.
The Baltic Dry Index (BDI) is an index published dailyby the Baltic Exchange in London, the leading globalmarketplace for brokering shipping contracts. Exchange
members include companies from the international bulk-shippingindustry, shipbrokers, freight derivative brokers, trading houses,shipowners, and other cargo interests.1 Every day, the BalticExchange asks brokers around the world the cost of bookingcargo of various sizes to move raw materials across variousocean routes. The exchange uses this information to computethe BDI—an indicator of maritime transportation costs formajor raw materials.
The BDI has generated interest as a leading indicator ofeconomic activity because manufacturers increase their demandfor raw materials to meet expected increases in the demand forfinished products.2 Likewise, a slowdown in economic activityreduces the demand for raw materials when manufacturersdetect increases in unsold inventory. The BDI can be viewed asthe equilibrium price of shipping raw materials, determined bythe supply of cargo ships and the demand for transporting rawmaterials by ship. First, the supply of cargo ships is inelasticrelative to demand because cargo ships are costly and time-consuming to build. In contrast, companies can simply stopbooking cargo ships when demand drops. Second, the index issensitive to changes in the price of crude oil. Fuel and port-related charges are significantly large components of the totalcost of maritime shipping.3 Although port-related expenses suchas dockage charges are relatively stable, oil prices are notoriouslyvolatile. As a result, the BDI is sensitive to changes in the demandfor raw materials and oil price changes.
Movements in the BDI can be traced to changes in globaldemand for manufactured goods. In addition, this demandaffects the price of crude oil, which in turn affects the cost ofmaritime shipping. Between January 2006 and October 2007,the BDI increased more than 400 percent, from 2,081 to 10,656points (see chart). This steady rise was largely due to the signifi-cant growth in the global economy for manufactured products.The growth rate of total industrial production (excluding con-struction) for member countries of the Organisation for EconomicCo-operation and Development (OECD) and six major non-members (Brazil, China, India, Indonesia, Russia, and SouthAfrica) was more than 6 percent per annum from March 2006to October 2007. Movements in this data series closely mirrorthe (lower) growth rate of industrial production of manufacturedgoods in the United States. Such high growth rates of industrialproduction around the world are likely to have also contributed
to a surge in crude oil prices, which increased from $67 perbarrel to $95 per barrel during the same period, thereby exacer-bating the rise in the BDI.
However, the index declined sharply to 6,052 points by lateJanuary 2008, only to rise again, this time reaching an all-timehigh of 11,440 points in June 2008. The growth in industrial pro-duction had slowed only marginally over this period. The increasein the BDI could be attributed to the surge in crude oil prices,which had increased by more than 52 percent in the first fivemonths of 2008 to $140 per barrel at the end of June. How ever,a sharp slowdown in the growth rate of industrial productionworldwide, and the consequent decline in oil prices, contributedto a precipitous decline in the BDI. As of November 31, 2008,the index was at 715 points, its lowest level since January 1987.
—Rajdeep Sengupta and Yu Man Tam
1 From the Baltic Exchange; www.balticexchange.com.2 Gross, Daniel. “The Best Economic Indicator You’ve Never Heard Of.” Slate,October 24, 2003; www.slate.com/id/2090303/.3 Rodrigue, Jean-Paul; Corntois, Claude and Slack, Brian. The Geography ofTransport Systems. New York: Routledge, 2006.
OECD + 6 Major Non-members: Composite Leading Indicators Total Industrials Excluding Construction(seasonally adjusted, 2000 = 100, year-over-year % change)
Baltic Dry Index12,000
Percent
BDI and Global Demand for Manufactured Goods
Contents
Page
3 Economy at a Glance
4 Output and Growth
7 Interest Rates
8 Inflation and Prices
10 Labor Markets
12 Consumer Spending
14 Investment Spending
16 Government Revenues, Spending, and Debt
18 International Trade
20 Productivity and Profits
22 Quick Reference Tables
27 Notes and Sources
Conventions used in this publication:
1. Shaded areas indicate recessions, as determined by the National Bureau of Economic Research.
2. Percent change refers to simple percent changes. Percent change from year ago refers to the percent change from thesame month or quarter during the previous year. Compounded annual rate of change shows what the growth rate wouldbe over an entire year if the same simple percent change continued for four quarters or twelve months. The compoundedannual rate of change of x between the previous quarter t –1 and the current quarter t is: [(xt /xt – 1)4–1] × 100.For monthly data replace 4 with 12.
3. All data with significant seasonal patterns are adjusted accordingly, unless labeled NSA.
We welcome your comments addressed to:
Editor, National Economic TrendsResearch DivisionFederal Reserve Bank of St. LouisP.O. Box 442St. Louis, MO 63166-0442
National Economic Trends is published by the Research Division of the Federal Reserve Bank of St. Louis. Visit the Research Division’s website at research.stlouisfed.org/publications/net todownload the current version of this publication or register for e-mail notification updates. For more information on data in this publication, please visit research.stlouisfed.org/fred2 or call(314) 444-8573.
National Economic Trendsupdated through03/06/09
3Research DivisionFederal Reserve Bank of St. Louis
Pages 16, 17: Government Consumption and Investment is current expendi-tures on goods and services, including capital consumption (depreciation) andgross investment, as reported in the NIPAs. The Unified Federal BudgetSurplus/Deficit differs from NIPA Basis in four main ways: (1) NIPA excludestransactions involving existing assets; (2) NIPA outlays exclude governmentinvestment and include consumption of government capital, while unified budgetoutlays do the reverse; (3) NIPA accounts exclude Puerto Rico and U.S. terri-tories; and (4) various timing issues are handled differently. Outlays andReceipts are from the NIPAs, except as noted. Since 1977, the federal FiscalYear starts on October 1. Excluded agency debt was 0.6 percent of federaldebt at the end of fiscal 1997. Federal Debt Held by the Public includesholdings of the Federal Reserve System and excludes holdings of the socialsecurity and other federal trust funds. Federal grants in aid to state and localgovernments appear in both state and local receipts and federal outlays.
Pages 18, 19: The Trade Balance (shown on a balance of payments basis) isthe difference between exports and imports of goods (merchandise) and services.It is nearly identical in concept to the Net Exports component of GDP, but dif-fers slightly in accounting details. The Investment Income Balance equalsincome received from U.S.-owned assets in other countries minus incomepaid on foreign-owned assets in the U.S. The investment income balance isnearly identical in concept to the difference between gross national productand gross domestic product, but differs in accounting details. The CurrentAccount Balance is the trade balance plus the balance on investment incomeplus net unilateral transfers to the U.S. from other countries.
Pages 20, 21: Output per Hour (Y/H), Unit Labor Cost (C/Y), andCompensation per Hour (C/H) are indexes which approximately obey thefollowing relationship: %(Y/H) + %(C/Y) = %(C/H) with %() meaning percentchanges. Unit labor cost is shown on page 9. Real Compensation per Houruses the CPI to adjust for the effects of inflation. Nonfarm business accountedfor about 77 percent of the value of GDP in 2000, while nonfinancial corpora-tions accounted for about 54 percent. Inventory Valuation Adjustments (IVA)remove the effect of changes in the value of existing inventories from corpo-rate profits and proprietors’ income. (This change in value does not correspondto current production and therefore is not part of GDP). Capital ConsumptionAdjustments (CCAdj) increase profits and proprietors’ income by the differ-ence between estimates of economic depreciation and depreciation allowedby the tax code. Components of national income not shown are rental incomeof persons and net interest.
SourcesBureau of Economic Analysis (BEA), U.S. Dept. of Commerce
National income and product accounts, international trade and investmentdata (except by country), auto and light truck sales.
Census Bureau, U.S. Dept. of CommerceInventory-sales ratios, retail sales, capital goods orders, housing starts,exports and imports by country.
Bureau of Labor Statistics (BLS), U.S. Dept. of LaborAll employment-related data, employment cost index, consumer andproducer price indexes, unit labor cost, output per hour, compensationper hour, multifactor productivity.
United States Department of TreasuryUnified budget receipts, outlays, deficit, debt.
Federal Reserve BoardIndex of industrial production, treasury yields, exchange rates, capacityutilization, household debt.
The Survey Research Center, The University of MichiganConsumer sentiment index.
Organization for Economic Cooperation and Development (OECD)GDP for major trading partners (not available on FRED).
NotesPages 4, 5: Final Sales is gross domestic product (GDP) minus change inprivate inventories. Advance, Preliminary, and Final GDP Growth Ratesare released during the first, second, and third months of the following quarter.Changes result from incorporation of more complete information. Real GDPis measured in 2000 dollars. The ISM (formerly Purchasing Managers’) Indexis a weighted average of diffusion indexes for new orders, production, supplierdeliveries, inventories, and employment. Aggregate and Average WeeklyHours are paid hours of production and nonsupervisory employees. TheInventory-Sales Ratio uses nominal (current-dollar) inventory and sales data.
Page 6: For information on how to calculate the Contribution of a componentto the overall GDP growth rate, see the October 1999 issue of the Survey ofCurrent Business, p. 16. The sign is changed for Imports.
Page 7: Ten-year Treasury Yields are adjusted to constant maturity; three-month yields are secondary market averages. All rates used in the yield curvesare adjusted to constant maturity. The 30-year constant maturity series wasdiscontinued by the Treasury Department as of Feb. 18, 2002. Standard andPoor’s 500 Index with Reinvested Dividends shows the total return: capitalgains plus dividends.
Pages 8, 9: Oil (West Texas intermediate) and Natural Gas (Henry Hub) spotand futures prices are listed in the Wall Street Journal. Spot prices are monthlyaverages of daily prices; futures prices are usually taken from the last tradingday of the month. Consumer Price Index is for all urban consumers. TheConsumption Chain Price Index is the index associated with the personalconsumption expenditures component of GDP. The Employment Cost Index(ECI) covers private nonfarm employers. ECI Compensation refers to a fixedsample of jobs, while Compensation per Hour covers all workers in thenonfarm business sector in a given quarter. In both cases, compensation iswages and salaries plus benefits.
Pages 10, 11: Effective with the January 2008 Employment Situation, theestablishment survey data for employment, hours, and earnings have beenconverted from the 2002 NAICS system to the 2007 NAICS system. For moreinformation see http://www.bls.gov/ces/. Nonfarm Payroll Employment iscounted in a survey of about 400,000 establishments (Current EmploymentStatistics). It excludes self-employed individuals and workers in private house-holds, but double-counts individuals with more than one job. The HouseholdSurvey (Current Population Survey) of about 60,000 households providesestimates of civilian employment, unemployment rate, labor force participationrate, and employment-population ratio. Population is civilian, noninstitutional,16 years and over. The 90 percent confidence intervals for the unemploymentrate (± 0.2 percentage points) and change in household survey employment(± 430,000) measure uncertainty due to sample size. Because the householdsurvey was changed in January 1994, data prior to this date are not strictlycomparable. The Bureau of Labor Statistics announced several revisions tothe Household Survey on Feb. 7, 2003, with the release of the January 2003data. For more information, see <www.bls.gov/cps/>. The Job Openings rateis the number of job openings on the last business day of the month as apercent of total employment plus job openings.
Page 13: The Michigan Consumer Sentiment Index shows changes in asummary measure of consumers’ answers to five questions about their currentand expected financial situation, expectations about future economic conditions,and attitudes about making large purchases. The survey is based on a representa-tive sample of U.S. households.
Page 15: Gross Private Saving is the sum of personal saving, undistributedcorporate profits with IVA and CCAdj (see notes for pp. 18-19), and privatewage accruals less disbursements. Gross Government Saving is net govern-ment saving (surplus/deficit) plus consumption of fixed capital. Balance onCurrent Account (NIPA) is net capital transfer payments to the rest of theworld plus net lending or net borrowing (international trade and income flows).
National Economic Trends
Research DivisionFederal Reserve Bank of St. Louis 27
