A gauge of global cargo demand is signaling record-breaking economic growth even as U.S. imports slow, suggesting that emerging powerhouses China and India are pulling enough weight to counterbalance a downturn in the world's biggest economy.

The Baltic Exchange's dry sea freight index, popular among economists because it is considered a good proxy for world growth and excludes volatile oil, has soared nearly 150 percent this year despite worries about the U.S. economy.

In 2001, the year of the most recent U.S. recession, the index lost nearly half of its value as demand ebbed. Now, China and India appear to be taking up the slack, buying up boatloads of food, coal and other raw materials to fuel their explosive growth, and the demand looks likely to last.

For some time, the conventional wisdom has been that the global economy has two engines, said Simon Rose, co-founder and chief executive officer of boutique investment bank Dahlman Rose. Europe is one engine, but the main engine has been the United States. Now, we have a third engine in China and India.

From the seaport in Long Beach, California, to the inland rail terminals in Kansas City and Chicago, shipments appear to be cooling as the U.S. economy trudges through a housing downturn, credit contraction and steep oil prices.

At Long Beach, one of the world's busiest ports, inbound shipments were down 3.7 percent in October, and year-to-date imports are little changed from 2006.

The latest reading on the Freight Transportation Services Index, compiled by the U.S. Department of Transportation, was the lowest since January 2004. The index tracks data from trucking, rail, inland waterways, pipelines and air freight.

But the global picture looks decidedly different. The Baltic Exchange's index, which hit an all-time high this month, reflects huge demand along major trade routes for coal, iron ore, cement and grains.

Exports from Long Beach were up a whopping 32.5 percent in October and 20 percent higher for the year to date, evidence of the stellar global demand as well as the weak dollar, which makes U.S. goods more affordable abroad.

Freight rates to ship grains and soybeans from the United States, Europe and South America have doubled and in some cases tripled from a year ago as demand soars.

In a clear sign of the rise of emerging markets, the International Monetary Fund said earlier this year that for the first time China was the biggest contributor to global growth on a market exchange-rate basis. Together, China, Russia and India will likely account for more than half of 2007 growth.

CAN IT LAST?

The question is, can emerging markets withstand a severe U.S. economic downturn?

David Rosenberg, an economist with Merrill Lynch, points to transportation trends as a key sign that the U.S. economy is headed for -- or may already be in -- a recession. In a recent note to clients, he listed 20 reasons why he thinks a recession has already begun. Five were related to weak U.S. transport.

But transport may also hold the key to avoiding a full-blown U.S. recession if exports remain hot.

If the U.S. economy is able to avoid a recession next year, it will be due primarily to the declining value of the dollar and strong global growth, which shows up as substantial growth contribution from net exports, said Daniel Meckstroth, chief economist for the Manufacturers Alliance/MAPI.

As for China, economists expect demand to hold firm at least until after the 2008 Olympics in Beijing. China is racing to finish infrastructure projects before the world's attention is firmly focused on the games there next summer.

China is going through the middle of a very large business cycle and that shows no sign of stopping right now, said John Wobensmith, chief financial officer of dry bulk shipper Genco Shipping & Trading Ltd. China will continue to need iron ore for its steel production and that iron ore will continue to come from Brazil and Australia.

Shipping from Brazil requires more ships in the water because the raw materials must travel farther to get to China. Congestion at key ports has also boosted dry bulk rates.

Although the once-dim prospect of oil at $100 a barrel now looks like it could become a reality -- thanks in large part to developing nations' thirst for black gold -- Wobensmith said rising fuel costs have had little impact on Chinese demand.

The Chinese government has made a decision to build up the country and bring it into the modern world, he said. The need for raw materials there overrides any freight costs.

While some analysts question whether China's hunger for raw materials will outlast the Olympics, Dahlman Rose's CEO Rose said the next phase in the country's growth -- plus that of India, which he described as an overlooked wild card -- will be driven by internal consumption as their people grow richer.

It's all about sheer weight of numbers, he said, referring to China and India's combined population of more than 2 billion people. Even if we wanted to, this is something we can't stop.

(Editing by Jonathan Oatis)

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