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Industrial Production and the Baltic Dry Index

by Jared A Levy

August 15, 2012 | Comments : 3 Recommended this article: (0)

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Industrial production moved slightly higher (+0.6%) in July after June and May were flat; expectations were for a 0.5% increase. Industrial production picked up 0.6% in July after slender 0.1% monthly gains in May and June, the Fed said. Capacity utilization came in as expected at 79.3%, which remains 1% below its average from 1972 to 2011. Are these really numbers that bulls can lean on?

The kick in the pants for the bulls was the Empire State Manufacturing Index that showed an extremely weak reading at almost negative 6; the expectation there was for a POSTIVE 6.6.

The point is that I am still not convinced that data flow is overall "positive enough" to justify a further rally here.

When Steve Reitmeister asked yesterday “what would it take to change you from a bear to a bull;” I refrained from answering because it would have taken up too much space in the RTI :)

A Lost Indicator

The Baltic Dry Index has lost its luster over the past year or so as a market indicator because some folks think the index is skewed because of the ridiculous prices being paid for commodities and shipments of goods back in the boom days from 2006-2009. I disagree; the index is real and it measures the cost and in essence the amount of shipments moving around the world. It's an extremely efficient way to measure supply and demand on a global scale.

With fuel prices through the roof all over the world, one would expect the cost of shipping to at least be stable or creeping slightly higher if global economies were stablizing. The reality is that prices are NOT stable in the index, far from it. In fact, the index continues to drop to levels only seen twice before in the last 15 years; 2002 and 2009.

To me, this is a realistic, complete indictor of the LACK of economic growth and even activity. International trade is the lifeblood of the world’s largest economies and it is barely flowing.

I believe that the Baltic Dry is the punctuation mark that comes right behind China’s recent weak data that could be the next leg down for the U.S. stock market.

Do you agree? Do you think the Baltic Dry still has a use today?

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