OECD LEIs Move Sideways...for Now

The main message from the OECD LEIs in November is that not much is changing. The indicators for the OECD region, the U.S., the U.K., the EMU and China are little-changed and clustered around the neutral reading of 100. Japan and China are below 100, indicating sluggishness while the EMU region has the highest reading of the group at 100.6. These readings precede a good part of the oil price drop.

Compared to six months ago, the OECD area, the U.S. and China are stronger. China, with a topical value below 100, has nonetheless improved the most on this basis. The U.S. and the OECD region are barely improved. The U.K. and the EMU are weaker on a six-month change basis.

Turning to the individual EMU members, we see LEI values below 100 in Austria and Germany. Each of them has a string of values below 100 that has showed some very gradual erosion. However, compared to 12 months ago, only Greece is weaker. But the OECD prefers to look at changes on the six-month horizon. On that basis, the EMU region is weaker and six of 11 members are weaker with Ireland unchanged. Improving over six months are Spain, Greece, France and Portugal. The austerity countries are showing the most improvement while the rest of the euro area largely is eroding.

The message from the OECD data is that conditions are still weak and not changing much but with a bias toward erosion. China has been weak and has implemented special fiscal stimulus. The OECD gauges say China is improving, if still struggling. Japan is struggling and even with massive QE in place has deteriorated on balance over six months. The U.S. is stable, showing a weak degree of expansion. The EMU is slightly stronger than the U.S. on its LEI gauge but is fading.

Since the LEI gauge is for November, we do not have data for the latter period in which oil prices have fallen to their surprising lows. Oil was trading in the mid $70 per barrel range or higher in November. What these indicators do show is how weak the entire OECD region was as of November with little forward momentum. The drop in oil prices, while good for growth in consumer nations, is also destabilizing and having pronounced negative effects in the oil sector as well as across supplier industries ranging into the steel sector. While the focus from the IMF and other institutions, like the Fed, has been on the positive effects of lower prices, there is clearly a good deal of disruption in play and that will be something to keep an eye on in the coming months. Europe, Japan and China seem to be pretty clear winners from lower prices, although high energy taxes in Europe will keep consumers there from feeling the full drop. The U.S. has an energy sector that had been growing by leaps and bounds and had been a driver for the manufacturing sector so the U.S. response will be more ambivalent. The LEI gauge in the months to come will be important to track.