OECD LEI Loses Momentum...Too Much Castor Oil

The OECD LEI is losing momentum. The OECD index is off by 0.3% in the recent month and the OECD-seven index is off by 0.4%. Over three-months we are seeing declines in the top OECD indices; on that horizon the US index is flat. The overall OECD index is off over six months and over 12-months. The declines in the index are minor but they are showing persisting weakness. The US index has turned spotty.

The OECD index is pointing to a slowdown phase in the offing. The OECD itself describes these indices as showing tentative signs of turning points in the United States, Japan and Russia. Signs of slowing are present in Canada, France, Germany, Italy, the United Kingdom, Brazil, China and India.

It is clear that the rebound phase of the recovery has already given way to something less robust. The OECD LEIs tend to precede turning points in economic activity by six months.

With the weakness in US exports in the May trade report it is becoming clear that there is plenty of negativism. The European economies are suffering growth set-backs and those headwinds now appear to be dogging US exports. We have seen German export orders take a hit from the slowdown. The slowdown is spreading.

If we go back to the first economic summit after Barack Obama was elected US President, we find the seeds of this crisis were sown. The US went to Europe with a plan for stimulus. But Barack was a new President; Geithner was a new Treasury Secretary and better knows in central banking circles- but not always for having done the right thing. The US team was not able to push its agenda of stimulus. The Germans won the day and we embarked on what have been several hard years of pushing for austerity.

I wonder how many European nations wish they could go back to that summit and vote with the US? A world with a little more inflation and higher interest rates and more growth would be far superior to this one, ensnared in some liquidity trap and without meaningful global demand-apart from traders trying to corner commodity markets. Ensuring several years of austerity in the global economy when it was still limping along in a wounded post- recession environment has been exactly the wrong medicine. The Teutonic solution was a titanic convolution. That remedy did not fit our needs.

The US recovery has never really gotten in gear and in Europe only Germany has had a real recovery. Other recoveries have been tepid and several countries now face potential debt ‘situations.’ We may conclude that Germany knows what policies are good for Germany but it does not have a clue what are the needs of other nations.

The best way to impose austerity is when economies have been booming and need to cool down, not when they are limping and need to heal and speed up. Imposing austerity in the early stages of an economic recovery from a severe recession is not really a good idea. Write that down somewhere and try to remember it. At least, this cycle might serve as a reminder for the future as a mistake we can avoid making again. So to the extent Germany is up in arms about having to financially carry the day in Europe, we can remind it that this was its preferred policy path. Be careful not just what you wish for, but what you lobby and politic for, and for what you put in place. Das chickens have come home to Das roost.

Actions have consequences.