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Economy in Brief

OECD Leaders: Four Months Down
by Tom Moeller October 9, 2006

The Leading Index of the major 7 OECD economies slipped another 0.1% during August after 0.2% declines during the prior two months, revised slightly shallower from the earlier reports. August was, however, the fourth consecutive month of slippage and that has not occurred since 2002. The declines lowered the index's six month growth rate to 0.5%, the lowest in more than a year.

During the last ten years there has been a 64% correlation between the change in the leading index and the q/q change in the GDP Volume Index for the Big Seven OECD countries.

The U.S. leading indicators were unchanged for the second month but have fallen 0.4% during the last five months. That dropped the six month growth rate to 1.2%, the lowest since Spring 2005. The weakness has been led by lower construction starts but consumer sentiment, new orders for durable goods and share prices improved. The correlation between the leaders' growth rate and U.S. real GDP growth has been a high 73% during the last ten years.

The leading index for the European Union (15 countries) fell 0.2% and the index's six month growth rate fell to 2.9%, the lowest since last November. During the last ten years there has been a 59% correlation between the change in the leading index and the quarterly change in the European Union GDP volume index.

The German leading index fell 0.1% for the second consecutive month but a previously reported 0.5% July decline was revised to -0.1%. and June was revised up to no change. The six month growth rate nevertheless fell to 3.9%, its worst in about one year. During the last ten years there has been a 32% correlation between the change in the German leading index and the quarterly change in GDP volume. Weakness in the leaders has been led by a worsening, negative interest rate spread and lower export orders.

In France the leaders rose 0.4% for the eighth consecutive monthly increase. The gains have left the series' six month growth rate at 2.7%. During the last ten years there has been a 54% correlation between the leaders' growth rate and growth in France's real GDP, up 4.9% (AR, 2.6% y/y) last quarter. Consumer confidence has improved markedly and industrial sector prospects also are up.

The Italian leading index fell sharply again. The 0.7% August decline lowered the series' six month growth rate to a negative 2.0%, the worst since 2003. Worsening terms of trade & higher interest rates account the weakness and have offset improved consumer confidence.

The UK leaders fell 0.2% for the second down month in the last three. That lowered the six month growth rate 0.8%, its worst since January. During the last ten years there has been a 36% correlation between the leaders' growth rate and U.K. real GDP growth.

The Canadian leaders also fell 0.2% after an upwardly revised 1.1% July spike. The index's six month growth rate held at a much improved 3.9%, its best in two years. The correlation of the leaders' growth with Canadian real GDP has been 49% during the last ten years.

The leading index in Japan fell 0.5%, the sixth consecutive monthly decline which dropped the index's six month growth rate to -3.6%. Share prices (recently), interest rate spreads and construction starts all are down from their highs. The leaders' correlation with Japan's real economic growth has been a meaningful 41% during the last ten years.

The latest OECD Leading Indicator report can be found here.

Do Inflation Targeters Outperform Non-targeters from the Federal Reserve Bank of St. Louis is available here.

The Exchange Rate-Consumer Price Puzzle from the Federal Reserve Bank of San Francisco can be found here.

OECD August July Y/Y 2005 2004 2003
Composite Leading Index  104.82 104.97 1.8% 102.97 102.49 98.10
 6 Month Growth Rate 0.5% 1.1% -- 0.7% 3.5% 2.6%
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