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Economy in Brief

OECD LEIs Point to Continued Growth But Maybe Not Much of It
by Robert Brusca  March 10, 2015

The OECD LEIs display values above 100 for most countries, indicating that growth is still on the docket for most of them. Japan, China, Austria and Germany are exceptions. But even the exceptions have numerical `handles' of `99', marking them as only marginally below the 100-steady-as-she-goes line. In addition, the ratio of the current index to its value of six months ago provides some reading on momentum; on that metric, we see lost momentum in a number of places.

The U.S., the U.K. and Japan each show a loss of momentum over six months. Within the EMU, Austria, Belgium, and Germany have lost momentum over six months. Portugal is flat over that horizon. Spain and Greece then France and Finland show the most pick up compared to six months ago. The OECD area as a whole shows some pick up as the ratio of the current to the six-month ago index is 100.1, but that is the thinnest of margins of gain. The OECD reading for January is 100.4, just a tick higher than the level it has occupied for the better part of one year.

The overwhelming story of the OECD LEIs is not so much that growth continues but that this stagnated environment endures.

While we have seen other reports show more life, the OECD forward-looking indicators are not yet putting much of a stamp of approval on that view. The U.S. and EMU show clear downshifts in their growth rates over one year for their respective LEIs (see chart). While the current LEI levels may be solid from a `growth vs. no growth' perspective, the outlook for growth acceleration is not good at all. Japan is holding to relatively stronger momentum but still shows some hint of fading.

What's wrong?

I will take this opportunity to harp about of the lack of a consistent and coherent set of rules for international trade that might otherwise focus policy on the right course of action. I am not speaking of WTO-type rules except to the extent that they should include exchange rate valuations. The lack of any sort of consensus on `exchange rate management' globally and the allowance of beggar-thy-neighbor exchange rate policies is undermining global growth. The dollar is at a 12-year peak vs. the euro and the euro is at a nine-year peak vs. the pound sterling. Exchange rates are being used in Japan, the EMU and China to assure growth. Meanwhile, the US has had a string of annual current account deficits back to 1982 and only in the early 1970s after a very severe recession did it have anything like a `string of surpluses.'

The dollar has not been allowed to find its equilibrium value. Since 1982 the U.S. current account has averaged a deficit that has been 2.8% of GDP. The dollar has NOT been `allowed' to see a lower level that would put the U.S. current account into equilibrium (balance). The last U.S. quarterly surplus on current account was run in 1991-Q2 at 0.16% of GDP. With the development of its oil sector, the U.S. was making progress in reducing its deficit relative to GDP now that progress is back-tracking as the energy sector is being wrecked by OPEC policy and U.S. official acquiescence. And U.S. deficit reduction progress is beating an even hastier retreat as the dollar rises vs. the euro, the yen, the yuan, and God-knows-what-else.

In a more civilized time, the European Monetary Union would be asked to stimulate itself and to raise its own domestic demand instead of engaging in monetary excess that drives its currency lower so it can suckle growth on the domestic demand it can find in the rest of the world. Especially with Germany, a country with enormous competiveness advantages and one of the largest current account surpluses in the world, there would be shock and repugnance at a policy that would take such a country and drive its exchange rate lower. Instead of shock and repugnance, we have business as usual.

Japan has special problems with its aging population and its past excesses as far as absorbing dollar reserves and its resistance to realigning its economy to accommodate more imports. Japan has outsourced much of its production, effectively hollowing out its manufacturing sector at home. Its shut down of the nuclear reactors has caused a flood of oil imports to send its trade positon briefly into deficit. But its level of public debt is massive relative to GDP. Its recent conversion to a policy of more fiscal prudence has left it with no other option but currency depreciation on back of an aggressive QE program.

China has long been a pariah of international trade, but its excesses were encouraged! China has now become so large and the financial crisis so weakened the countries of the West that China can no longer depend on export-led growth. But as it cuts its sights to a growth rate of 7% it continues to lean on its exports. China, a communist country, has taken to assailing the multinational corporations that reside there for misuse of their `monopoly' power. That is a hilarious charge in a communist country- on top of being untrue! Yet, China is simply using all the leverage (and fabrication!) it can get to try to manipulate foreign firms operating there. China has pursued a low wage/accumulate-foreign-exchange-reserves policy. This has allowed its currency to remain weak, as it bought dollars and invested in the U.S. rather than to sell them and let the dollar fall. China amassed a huge share of global production and repressed consumption. This has led to huge global imbalances and to weak global growth as China has contributed far less to global demand than it should (hint: production is not consumption).

Because there are not `foreign exchange police' exchange rates have become adjuncts to domestic policies thrusting imbalances on other countries much like dumping your garbage over the fence on your neighbor's lawn and making him deal with it. But since U.S. corporations benefitted by getting lower labor costs and exported back to the U.S. where they made sure to contribute to the right politicians, not one U.S. politician has paid more than lip service to complaints about unfair trade and exchange rate policies. To be fair, Mitt Romney had unfair trade as a key part of his platform, but you can see where that got him. This is not a burning issue to most Americans only because they do not understand that this is why America is slowly going down the drain. That cheap stuff you buy from abroad is exacting a price from you. You can't have your (cheap) cake and eat it too.

Fair trade can only occur when it is mutually beneficial. LOOK IT UP: Google it. Check Wikipedia or drag out some old economics text. This phrase is always present. So when the U.S. only imports and its exports lag badly where is the `mutually' part? While some will say that we get goods and the Chinese only get IOUs, I say, `tell it to Greece.' How is that working for them? If you say, yes, but we are the reserve currency, the response is, `okay, but for how long?' We are living beyond our means and could be put in a position where we could no longer afford even our national defense bill.

Free trade has to occur at market exchange rates, not at manipulated exchange rates gotten to by piling on foreign exchange reserves (look at the reserve holdings and acquisitions of most Asian countries). In a properly managed global economy, we would not see every country trying to debauch its currency at the same time to getting a bigger piece of U.S. domestic demand as they are now trying to do. They would be looking inward at their own policies and trying to fix what's wrong. And that's what's wrong. It will not be fixed by sending more goods to the U.S. That will undermine the U.S. economy. A stronger dollar will increase the outflow of American wealth and depress American income growth even as it BOOSTS American purchasing power. That will be a gain made at great cost. No one seems to get it. But the strong dollar - the overly strong dollar- is a threat of huge dimension and neither political party seems to be able to see it. It is a policy that allows U.S. corporations to remain successful while tapping cheap foreign labor and reducing their output profile in the U.S. - they succeed by becoming `less American'.

So what will Americans do in the future? Does America have a skills problem as the JOLTS report seems to tell us? Or does it have the problem of being overpriced at every level of wages so that the only jobs we will create are the ones where we don't compete with foreigners, those in the American services sector? Are we transitioning from `made in America' to `maids in America'?

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