The Global Supply Chain Pressure Index, developed by researchers at the New York Federal Reserve, is a new way to measure the logistics chaos that is being blamed for some of the rise in consumer prices (GSCPI).
The new metric combines 27 indicators, including two shipping indices, the Baltic Dry Index (BDI) and the Harpex index, to calculate the standard deviation from the mean since 1997. Its goal is to provide a “more comprehensive summary of potential disruptions affecting global supply chains.”
So, how tall is it?
It measured 4.43 and 4.37 standard deviations above average in October and November (the most recent two months available). To use financial trading jargon, the current situation is a “four sigma” event.
Following the onset of COVID, the GSCPI experienced a sharp increase, coinciding with the initial lockdowns in China, Europe, and the United States. Then, coinciding with the surge in consumer demand, came a second, even larger rise — one that is still ongoing.
The New York Fed researchers stated in their introductory post on Tuesday, January 4th, that “more recently, the GSCPI appears to suggest that global supply chain pressures, while still historically high, have peaked and may begin to moderate somewhat going forward.” The “potential peak” angle was highlighted in headlines for stories on the new index by Reuters, CNBC, and Business Insider.
The Fed researchers were questioned by American Shipper about the evidence of moderation. They responded that the evidence is a drop in the index in November compared to October.
However, the index fell 1.4 percent from October to November after rising 2,115 percent between October 2020 and October 2021. And, over the GSCPI’s time span, there have been numerous instances when the index fell by 1.4 percent or more in one month and then rose again, most recently in June (complete index dataset here).
Index constituents
The GSCPI is “built on variables that are meant to capture factors that put pressure on the global supply chain,” wrote the authors at the New York Fed: assistant VPs of research and statistics Gianluca Benigno and Julian di Giovanni; officer Jan Groen; and senior research analyst Adam Noble.
In addition to the BDI and Harpex, the GSCPI incorporates four other transportation inputs: price indices on airfreight costs for Asia-U.S., U.S.-Asia, Europe-U.S., and U.S.-Europe from the U.S. Bureau of Labor Statistics.
The remaining 21 components are PMI surveys for three subcomponents — delivery times, backlogs, and purchased stocks — for seven economies (euro area, China, Japan, South Korea, Taiwan, U.K., U.S.).
Why are BDI and Harpex used?
The inclusion of the BDI and the Harpex may appear strange to ocean shipping insiders.
The BDI measures ton-mile demand for dry bulk commodities, primarily iron ore, coal, and grains, in relation to bulk carrier supply near loading ports. Congestion does affect effective ship supply, especially in 2021 due to strict COVID protocols at Chinese import terminals. However, over-ordering of bulkier newbuilds relative to demand drove the BDI during the decade preceding COVID far more than congestion.
The Harpex index tracks the rates that cruise lines pay to charter ships rather than the rates that cargo shippers pay to transport cargo. Congestion in the supply chain severely limited effective ship supply in 2021, increasing ocean carrier demand for charterable vessels and driving charter rates to all-time highs. However, prior to COVID, container-ship charter rates were determined by excess new-build deliveries relative to demand, rather than port congestion.
When asked why the Harpex was used rather than a spot freight rate index such as the Drewry World Container Index, the New York Fed researchers stated, “Harpex was chosen because a longer sample was available.” We’ve only had Drewry access for the last couple of years.” (The Harpex index is only five years older than Drewry’s World Container Index, which has been published since 2006.)
When asked why the BDI was included, the researchers stated that it was chosen “based on data availability.”
The principal component analysis is used to calculate the GSCPI. When asked how the GSCPI weights the various components, the authors stated that the BDI weighting is 0.02 and the Harpex weighting is 0.09. “To put this in context, the weights of the country-specific delivery times range from 0.30-0.35. As a result, the BDI has the lowest weight among the 27 variables that comprise the index, and the Harpex is among the bottom four.”
Indeed, a chart released by New York Fed researchers of PMI subcomponents weighted by GDP demonstrates the significance of delivery time indicators, which measure how supply chain delays affect producers.
The GDP-weighted delivery times index (the blue line in the chart below) appears to most closely track the overall path of the GSCPI during the COVID era, including a significant decline around mid-2020 as the effect of initial lockdowns on delivery time-reversed, a pattern that diverged significantly from freight rates.
Is it a head fake or an index peak?
Container freight rates appeared to be peaking in September-October, but they didn’t fall far before plateauing, and they’ve begun to rise again in the last two months. Similarly, the Harpex charter rate index has been rising since November.
Another indicator has been the increasing number of container ships waiting for berths in Los Angeles/Long Beach since mid-June. As of Tuesday, there were 101 container ships waiting in the Pacific, which was a record high.
In terms of whether the GSCPI has actually peaked, as the New York Fed researchers believe, or whether it is a sham — as earlier drops in freight and charter rates were — the release date for the December index has yet to be determined, but monthly updates will be published.
