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Economy in Brief

OECD LEIs Unmatched Assessment of Widespread Weakness and Declines
by Robert Brusca  November 9, 2022

The OECD leading indicators this month are painting an extremely weak and worrisome picture of the world economy spanning both developed and developing economies. The overall OECD measure declines in October and September. It declines on balance over three months, and it declines on balance over six months. The index does increase by 1.9% over 12 months. In fact, all the major aggregates on the OECD index have that same property that they increase over 12 months and decline on the other horizons. Among developed economies, Japan is the sole exception and Japan shows a flat October and a flat September; its index declines over three months and declines over six months and logs a 1.5% increase over 12 months.

The U.S., the largest of the OECD economies, logs an index decline in October and September; the index declines over three months and over six months although its three-month decline is less than its decline over six months and the U.S. index increases by 1.8% over 12 months. That is still much more weakness than it is mixed.

As a further reference I take these OECD measures and I rank them measures historically for the whole of the OECD, the level standing has been this weak or weaker 7% of the time, the top seven OECD economies have been this weak or weaker about 7% of the time. The euro area has been this weak or weaker 5.5% of the time. Japan has been this weak or weaker 54.5% of the time and is the only country above its historic median on this timeline. The U.S. has been this weak or weaker about 14% of the time.

Looking at changes in the six-month averages which is one of the preferred ways to look at the performance of the OECD data, we find declines in October and September. Over the recent six months the previous six months we find declines. For 12 months ago the six-month decline was showing increases although smaller increases than for most of the other OECD aggregate metrics.

Looking at the OECD amplitude adjusted indicators, we see four months of a steady diet of indicators for the 12 entities the table including developed economies and economic units that include both the OECD, the OECD7, and the European Monetary System all with values below 100 indicating growth is subpar in all these regions and countries. The sole exception to this is Japan. However, when we look at the ratio of the current index compared to six-months ago in Japan produces a ratio below unity which indicates a slowdown in progress along with the other readings in the table.

The queue or ranked standings of these countries and areas are applied to their levels and shows readings below the 50% mark for all countries except for Japan and Germany. France has a reading at its 45.9 percentile but after that there was no reading above its 20th percentile except for China in its 20.2 percentile. The readings are weak; the momentum is weak; weakness simply abounds, and all the OECD area is affected across its most developed economies.

Turning to developing economies (and note that we include China in both groups), we see month-to-month uninterrupted weakness and each of the most recent months August, September and October period there are declines in the OECD metrics over three months, over six months, over 12 months and every country in the table. The ratio of the current indexes to their value of six-months ago are lower in all countries and the percentile rankings mark Slovenia as having the strongest percentile standing at a 46.8 standing - still below its historic median. India has a 40.7 percentile standing. Mexico has about a 45-percentile standing. China, on this timeline, has a 22.1 percentile standing. Brazil has a 23.7 percentile standing. Among the weakest standings are Chile at a 2.9 percentile standing, Indonesia with a 5.1 percentile standing, Poland with a 5.4 percentile standing and Hungary with a 6.1 percentile standing.

These results are quite unusual. It's a very broad report that looks at developing and developed economies and uses leading economic signals to assess what is going on in these very different parts of the world; yet, in this report there is no strength whatsoever. The best that we have is that Japan is indicating readings that are near historic averages.

Unmatched Breadth and Unequivocal Weakness

Inflation remains high in the OECD area and among its key individual members. Key global central banks continue to fight inflation and for the most part all of them have inflation rates well above their key interest rates and therefore all of them are still only chasing inflation; they are not in a position of strength to deal with it yet. And despite that, we already have this kind of weakness showing in the global economy.

Globally inflation is just in terrible shape and there is no example historically where central banks fight off an inflation rate this bad successfully without running a recession. For those who think that that's the right thing to do now, the question is whether this is a good time to begin economic experiments or not. The question for central banks now is this: do they feel lucky? If they feel lucky, will they be lucky? Have they already expended enough ammunition that they can slow down the anti-inflation onslaught in the future? Or will backing off now create the same kind of inflation pressures and problems that led to disaster in the late 1960s, 1970s and early 1980s? Is the Fed's flirtation with trying to create a soft landing in the middle of a storm of inflation a good idea or is it an idea whose time will never come? Financial markets are busy placing their bets. It's not Powerball but don't forget to place YOUR bet.

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