Global Economy Warning: Baltic Dry Index (BDI) Headed In The Wrong Direction
The London Mercantile Exchange (LME) has reported that in the first quarter of this year, copper inventories hiked up 78% to 569,775 tons. Copper inventories are a key indicator of industrial production and manufacturing, because the metal is used to make many different goods. Copper inventories increasing to record highs suggest there isn’t a lot of production happening in the global economy.
Likewise, one of the key indicators I often quote in these pages, the Baltic Dry Index (BDI), has also been lagging. This key indicator shows the demand in the global economy. If it rises, it means global demand is increasing; if it declines, then the opposite is true. Take a look at the chart below:
Chart courtesy of www.StockCharts.com
Unfortunately, the five-year chart above clearly shows that the demand in the global economy hasn’t really picked up since the financial crisis. In fact, this key indicator is still in decline despite all the paper money printing by central banks around the world.
To top this off, emerging markets in the global economy, which were the main force driving economic growth after the financial crisis, are now in a rut and are looking for growth.
China, for example, has witnessed an economic slowdown that is causing havoc in the country. In 2013, the Chinese economy is expected to grow at the slowest pace seen in many years.
Likewise, nations like South Korea are struggling. The country lowered its growth targets for 2013 by more than 20%, from three percent to 2.3%, due to poor local demand and slowing exports to the global economy. (Source: Financial Times, March 28, 2013.)
A significant portion of our gross domestic product (GDP) comprises exports to the global economy. In 2012, exports from the U.S. to the global economy were $2.18 trillion. (Source: Federal Reserve Bank of St. Louis, March 28, 2013.) An economic slowdown in the global economy will impact U.S. exports and the country’s GDP.
In the fourth quarter of 2012, U.S. economic growth was dismal, as the suffering in the global economy increased and the demand for U.S. exports declined. Seeing our GDP growth turn negative will not take much, given how fragile the global economy has become. The optimism created by a rising domestic stock market masks economic reality.