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Economy in Brief

OECD LEIs Point Lower...Sad Day For Economics is Confirmed...
by Robert Brusca  November 14, 2011

The OECD LEIs are on a waning path. The OECD prefers to look at changes over six months on its indicators. We plot the OECD LEI metrics on the chart and provide as a set of sections in the bottom panel of the table that zooms in on 6-month growth strings. Viewed in that way the LEI metrics are pointing to declines across the board is which what the OECD is warning about today.

Month to month the OECD six month leading indicators are still falling. Taken as an annualized percentage change over six months they are off by 5.2% over all, while the OECD-seven country index is off by 6.3%. The US Index according to the OECD is off by 4%. On a month-to-month basis the US six-month average has just slipped into negative territory this month.

The OECD metrics are of course mechanical calculations. In the real world we know that Europe is having real troubles and that two countries in the Zone are in the process of installing new governments (let’s hope that is easier than installing a new Microsoft operating system).

Europe is beset with political and economic problems and a special aspect of its political problems have to do with an inability to come to an agreement in the Euro-Area about what more to do to help the troubled borrowers and to provide a back-stop that might also serve to protect banks. Some want to do more and some do not. In addition there is a continuing conflict about the role of the ECB. Bundesbank president Jens Weidmann just this morning urged other EMU members to agree to stop the involvement of the ECB in the bailout process.

This remains a big sticking point in Europe. Most Europeans want to backstop the troubled sovereigns and the banks while the Germans want to protect and defend the integrity of the central bank first and foremost. Simply put: those goals conflict. This ongoing conflict casts a strange light on Angela Merkel who is in the news today talking about doing all they can to keep the EMU club from losing any members. Yet, in recent weeks and days she has been criticized for planning an exit out the EMU back door for Germany or unceremoniously an ejection out the window for those not in compliance with their austerity programs. She and Sarkozy took a hard line stance on Greece that caused the Greek government to fall. Despite her take on keeping the membership intact, Germany has taken a very firm line that the countries with austerity programs need to buckle down and implement them. Period! Period? That could be troubling...

The darker side of this debate is not simply wondering where Angela’s heart really lies, but it is in the fact that OECD reports foreshadow darker days ahead. The OECD LEIs forecast a broad slowing that casts a pall over the ability of countries in austerity programs to make good their numbers. If there is going to be a major slowdown that will pose problems for inflexible diktates and certainly a bigger problem if that slowdown becomes recession.

So while markets cheered last week’s action by the Greeks, the over the weekend passage of some new austerity measured by Italy, the ouster of two Euro-leaders, and the introduction of two new unity governments, the plot is continuing to thicken. Europe’s crunch point is getting to be more of an issue not less of one. More and more economic clouds overhead are dark or darker. The IMF gave a separate warning to the rich countries that they are not out of the danger zone of recession yet. Isn’t that special? But has had no impact on policy choice.

STILL...it is amazing to note that with all the forecasts of a slowdown and with the IMF warning the rich countries of downside risk, austerity remains the policy of the land. Keynesianism is so totally out of favor that it cannot be implemented anywhere where it might do good. Some governments have overstimulated and overused the government sector in good times. Some have tried to create a social condition that was beyond their reach and beyond their financial limits. Some have done it to such an extent that they can longer press a greater government role into service – even if it is the better short-term medicine. Even in the US, the Super-committee is meeting to cut the US fiscal bloat. Policymakers there seem unable or unwilling to decouple the long run requirement for less government with the short run need for more aggregate demand as US job growth wallows at low growth rates.

In the end, it has become a sad day for economics. It is like taking the saw from the carpenter or the gavel from the judge. How will he do his job? We have unfinished business that is likely to remain unfinished as long as certain tools cannot be removed from the tool-kit. A storm is approaching. You figure out what’s likely. It seems obvious to me...

OECD Trend-Restored Leading Indicators
  Growth: M/M Growth Progression-SAAR
  Sep-11 Aug-11 3Mo 6Mo 12Mo Yr-Ago
OECD -0.5% -0.5% -5.9% -5.2% -1.8% 3.6%
OECD7 -0.6% -0.7% -7.4% -6.3% -2.1% 3.3%
OECD US -0.3% -0.5% -5.1% -4.0% 0.1% 4.3%
  Six Months Six Month Readings at 6Mo Intervals
  Change in 6M Avg Recent six 6Mo Ago 12Mo Ago 18Mo Ago
OECD -1.2% -0.6% -5.2% 1.7% -0.1% 7.4%
OECD7 -1.4% -0.7% -6.3% 2.2% -1.0% 7.8%
OECD US -0.2% 0.5% -4.0% 4.4% -0.4% 9.2%
Slowdowns indicated by BOLD RED
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