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Economy in Brief

OECD LEIs Show Widespread Slowing
by Robert Brusca  October 8, 2015

The OECD area shows a step down to 99.9 from 100 demonstrating sub-normal growth. The U.S. index fell to 99.2 in August from 99.5. The U.K. fell from 99.7 to 99.5 in August. Japan fell to 99.8 in August from 99.9. China fell to 97.2 in August from 97.6. The EMU index ticked up to 100.7 in August from 100.6 in July. It is the lone improving area.

Weakness is widespread with the e-Zone showing a reading above 100 and one that is advancing as well; traits that EMU alone has among the industrialized nations in the table top. Within EMU all original members listed in the table have readings of over 100. And of those 11 countries only four show month to month declines in the level of their respective LEI readings: Portugal, Spain, Ireland and Belgium. However, only Greece, Spain and Portugal show declines over six months. While growth in the euro-zone has been slow, it is showing steady improvement and it has logged above normal levels in all eleven countries. But, Europe has a low standard for "normal" these days.

Outside of EMU it is a completely different story. Of the four countries and one region listed in the top of the table only EMU shows a higher LEI level over six months. The OECD region as a whole is net lower over six months. China is weakest followed by the U.K. followed by the U.S. and then Japan. Trends over the six month horizon are discouraging.

The U.S. and China have long strings of underperformance while the U.K. has only started underperforming in June. Japan's underperformance began in July.

These indices from the OECD updated only through August, formalize something that some economists have been saying for some time: that the global economy is slowing. And if EMU is supposed to be our savior God help us! EMU is not gathering strength. More recently Germany is looking weaker as orders output and exports have slowed.

In a recent interview Ben Bernanke talked of the U.S. expansion as solid - something that is belied by the data from the OECD. He also noted that it would be bad to slip into recession with rates so low because the U.S. does not have "terrific" options for responding. From this statement it is easy to see why Fed members want to hike rates. But it clearly is not a good idea to hike rates and cause a recession so the Fed can cut rates to try and ameliorate one. Of course, every Fed member will attest that to cause a recession with rate hikes is not an objective. Rather the intent is that rate hikes will be slow and gauged to the economy's ability to withstand them. But then different Fed members have different assessments of how strong the economy is and what the economy can take. It should be clear that the way ahead is anything but clear.

It is interesting to survey what central bankers are saying currently. In public many Fed officials are downplaying the weakness in overseas markets. Today the ECB minutes talked of how downside risk had increased in the euro-area and to the inflation outlook largely because of developments in emerging markets. The Fed members and ECB member seem to be seeing different things. In the U.K. the BOE kept policy unchanged today on a slightly split eight to one vote. In Japan the BOJ continues to see moderate growth although Japan's economy-watchers index fell to an eight year low.

Central bankers unfortunately seem to have "own view-colored" glasses (That's OV rather than UV) that see the economy in the light that the policymaker prefers for the policy choice he or she already has made. In the US it is all too clear that Fed members are trying to smash the square peg of economic reality into the round hole of their policy objective. And this is a very disheartening process to watch. It certainly reduces our trust and belief that the Fed will do only what the economy can bear when it comes to rate-hiking. Unfortunately, economic policymaking is not like dog-training. Central bankers can't bend the economy to their will. But they can break it.

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