As to why the Baltic Dry Index (BDI) works as an indicator, see here:As noted here,
The BDI is one of the purest leading indicators of economic activity. It measures the demand to move raw materials and precursors to production, as well as the supply of ships available to move this cargo. Consumer spending and other economic indicators are backward looking, meaning they examine what has already occurred. The BDI offers a real time glimpse at global raw material and infrastructure demand. Unlike stock and commodities markets, the Baltic Dry Index is totally devoid of speculative players. The trading is limited only to the member companies, and the only relevant parties securing contracts are those who have actual cargo to move and those who have the ships to move it.
The BDI factors in the four different sizes of oceangoing dry bulk transport vessels:
Just last month, the Marketplace radio folks said Economic eyes again turn to the Baltic Dry Index, but there may be more to a decline in current days than declining markets -
And there's another reason for thinking that the big drop in the Baltic Dry Index may not be as menacing as it seems. The cost of shipping reflects not only the demand for raw materials, but also the supply of ships. Amir Alizandeh of the Cass Business School has been studying the accuracy of the Index as an economic predictor.So, when you seen a chart like the one below on Bloomberg, it may be too many hulls (in this case, Panamax hulls) chasing too few cargoes.
"If you have too many ships around, then this will result in a drop in the index," he says. "And that's the situation at the moment: We have too many ships chasing not enough cargoes."
The economic boom that preceded the collapse of Lehman Brothers had triggered a ship-building frenzy. All those extra ships have now been delivered, and the world has 60 percent more bulk carrying vessels than it needs.
Which allows you to understand headlines like Baltic Dry Index weighed down by Panamax.
Just a reminder to know the background of any index you might plan to use to foresee the future.