James Hamilton, 08 July 2019

Shipping costs offer a potentially attractive measure of world real economic activity. However, the popular approach of removing a deterministic trend is not consistent with the observed behaviour of shipping costs and results in an unrealistic measure in data since 2015. This column compares alternative monthly measures based on shipping costs with direct estimates of world industrial production in terms of coherence with world GDP and usefulness for forecasting commodity prices, and concludes that industrial production is a much better measure. If shipping costs are to be used, the cyclical component should not be calculated using residuals from a linear trend.

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