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Economy in Brief

OECD LEI's Show Severe And Worsening Downturn
by Robert Brusca March 6, 2009

The plunge in the US, Japan and European LEIs is quite characteristic of recession as the chart on top demonstrates. However, the severity of the declines is unusual. In the past 40-Years only the 1973-75 downturn produced larger declines for the US. Japan’s decline is already steeper than its 1973-75 recession drop; Europe’s is about the same and the US drop is not (yet?) as severe.

However the OECD framework shows that the declines across most regions are accelerating. Across 6-mo intervals all the main groups are declining increasingly rapidly over each of the last two six month segments (bottom panel of table). Separate progressive growth rates (top panel of table) show that that over three months the growth rate in Europe has showed some recovery compared to its performance over six months. But that ‘improvement’ is not by much.

The chart below shows that the OECD and US Conference Board indices (LEIs) have different views of the US situation. In past deep downturns the Conference Board index fell by more. In this episode- - at least at this point of the downturn – the OECD index is showing a substantially sharper US decline and one that is accelerating instead of moderating as in the US treatment from the Conference Board Index.

On balance the OECD signal for the US is much worse than from the US own LEI that has actually stated to turn up (less down) in January. More topical data from Europe for February suggests that conditions there continue to weaken. The LEI signal is not infallible and may not always give the most prescient look ahead. But it is only one index- a single number- and only so much can be expected from it. History is quite kind to the LEI gauge as the frame work has a very good and consistent cyclical signal. For the moment the message is quite clear that the OECD is not signaling that the worst is over. It is signaling that we are still in the middle of a difficult and severe downturn- quite severe by the standards of the past 40 years – and that continued vigilance is recommended. It’s a very good thing that the ECB joined the BOE in rate cuts this past week. Clearly the cut was needed.

As for the US discrepancy in the LEI signals that obviously bears some watching.

OECD Trend-restored leading Indicators
Growth progression-SAAR
  3Mos 6Mos 12mos Yr-Ago
OECD -12.8% -9.9% -5.6% 1.3%
OECD7 -14.7% -11.3% -6.6% 0.7%
OECD. Eur -11.3% -9.5% -6.0% 1.4%
OECD. Japan -14.1% -9.9% -4.0% -1.9%
OECD US -17.4% -12.8% -7.6% 1.2%
Six month readings at 6-Mo Intervals:
  Recent six 6Mo Ago 12Mo Ago 18MO Ago
OECD -9.9% -1.1% -0.3% 3.0%
OECD7 -11.3% -1.6% -1.1% 2.5%
OECD. Eur -9.5% -2.2% 0.5% 2.3%
OECD. Japan -9.9% 2.2% -2.6% -1.2%
OECD US -12.8% -2.1% -1.4% 3.8%
Slowdowns indicated by BOLD RED
large image