OECD Leading Indicators Move Up But Slow Down

A slowing in growth: The overall OECD area leading indicator rose by 0.2% this month as the growth rate over three-months fell short of the six month pace and the six month pace fell short of the 12-month pace.

Slowing is on schedule in some sense - The Yr/Yr growth rates are still at very elevated rates. But the pace is beginning to slow. Since we are looking at the highest growth rates for these three leading countries on this measure since the early 1970s it is not surprising that the pace is beginning to ratchet lower. Rarely have the three key OECD regions/countries grown at a pace in excess of what they are showing now.

Euro-Area is being stung by its debt problem fallout: The euro-area indicator, however, isn’t just slowing. Its indicator is actually dropping by 4.7% month-to-month. It is perhaps the first real sign that Europe’s growth is being ensnared by the geopolitical and debt problems of the region. Over three months the OECD measure for the euro-area is up by just 1% at an annual rate. This compares to a 4% pace for the entire OECD region and a 7% pace for the US.

The decelerations: Over six months the OECD growth rates have fallen to about 60% of their 12 month pace. For Japan and the US things are holding up better as Japan’s current growth over six-months is 82% of its twelve-month pace and for the US it is 75% of its twelve-month pace. But for the euro-area growth it is only 36% of its twelve-month pace over the last six-months. The OECD prefers to look at six month growth rates and if we compare the current six month pace (Apr 2010-Oct 2009) to the previous six-month pace (May2009 to Oct2009) the OECD deceleration is even more stark with growth in the recent six month period that is only 21% of growth in the previous six month period.

Prospects: On balance the revival of the OECD region, judging from the leading indicator growth, has been excellent. But the real proof is in the sort of recovery that develops, not the strength of the indicator that precedes it. The sharp recent fall-off of the euro-area index is a warning of another sort. The sorts of variables that plug into leading indicators can be accurate harbingers and they can also be the sorts of things that overreact to events. Right now the euroarea is trying to sort out the nature of the geopolitical and economic mess that it is in. There has been far more contagion that has affected expectations and other sensitive variables outside the zone that there will be transmission of weakness from the Zone to theses same regions. I also believe that the financial element of the crisis is overblown –a bit like reinjuring an old wound before it is fully healed. It will take time to see how much actual economic data are affected by these ongoing developments in the Zone and in Europe. I think the OECD indices overstate the prospects for weakness in Europe.