OECD LEIs Tilt to Continued Weakness

OECD leading indicators show mostly weakness but mixed performance among the top regions. The level of economic performance grades as consistently weak or very weak while various measures of momentum are mixed.

Recent momentum Month-to-month in May the OECD 7, the European Big 4 and the U.S. show essentially unchanged normalized leading indicators while Japan ticks up by 0.1% as does the index for the Asian Major 5 (China, India, Indonesia, Japan, and South Korea). Over three months, the OECD-7 index falls by 0.1% and the U.S. index falls by 0.6%. But rising by 0.6% is the European Big 4 and the OECD Japan; the Asian Major-5 index is rising by 0.9%. Over six months, the OECD-7 index has been flat. The U.S. index is down by 0.5%, Japan's index is up by 0.2% while the Asian Major-5 index is up by 0.7% and Europe's Big-4 index is up by 0.9%. The broader 12-month change indexes show declines for all the metrics except for Japan; it is flat over 12 months.

Normalized index standings are weak These normalized indexes all have standings that are below their midpoints (below the 50-percentile mark). Japan comes the closest to being near its neutral mark with a 48.3% standing. After that, the Major 5 in Asia have a 28.4 percentile standing, but then the U.S. reading has a 14.7 percentile standing, the OECD 7 has a 12-percentile standing and Europe's Big 4 have an 11.6 percentile standing. All the major groups show weakness; Japan, viewed in isolation, is closer to a neutral reading and it is the only comparison like that.

Six-month changes The OECD expresses the preference to look at its indicators over six months. In the second panel of the table, we see changes in the 6-month averages that show declines in May for all these groups except for the Europe Big-4 measure that is up by 0.1% and for China that is up by 0.6%. A month ago, all the readings were negative except for China with a 0.4% reading. Looking at point-to-point 6-month changes on intervals of 6-months, we see many more negative readings although the recent 6-months show an increase in Europe’s Big 4 (of 0.9%) and a gain in Japan. There are 6-month declines in the U.S. and in China and with the OECD-7 measure flat. But 6-months ago the 6-month point-to-point changes show all negative readings and for 12-months ago the six-month changes are all negative except for Japan (at 0.1). Mixed 6-month results are a new phenomenon.

The bottom panel of the table looks at the amplitude adjusted readings in level format. In terms of levels, only Japan has a reading above 100 in May, indicating that it is above its adjusted trend. China has a reading in the table above 100 and its colored red because the underlying data are below 100 but round up to 100. What you see in this panel of the chart is a persistence of indexes languishing below 100 that signal performance is below trend values. On the far right, we have queue standings for the levels and again all of them are below the 50th percentile mark. Japan has the strongest reading at a 48th percentile standing along with Germany; China logs a 44.5 percentile standing. All the rest are more substantially below the 50% mark indicating weakness and below trend growth.

Selected developing economies Table 2 (below) presents the amplitude adjusted readings for 8 developing economies. The diffusion readings show that there are slightly more increasing than decreasing leading economic indexes among the developing economies in April and May. March was a toss-up with mixed readings and a 50% split.

Growth rates show only India, South Africa, and South Korea, with persistent negative readings, while China and Turkey have persistent positive readings. Turkey manages to do this while continuing to run an enormous inflation rate. The diffusion readings show us going from 12-months to 6-months to 3-months with indexes generally improving rather than deteriorating. However, the average level of the indexes shows only Mexico and Turkey with indexes of over 100 (expressed in black type-, Column 7). The rest are below 100 or only statistically round up to 100 for a number below it. Six-months ago (ratio to six months ago) showed improvement in progress in Mexico, Turkey, and China. Turkey and China also posted those signals 12-months ago. The percentile rankings continue to show a great deal of weakness but only Turkey is above its 50% mark although South Africa and Mexico along with China have readings in their 40th percentiles. Brazil has a reading in its 32.7 percentile. The countries with the weakest amplitude adjusted leading indicators are India, Indonesia, and South Korea.

Summing up On balance, the leading economic indicator data show a lot of unevenness across regions and countries rather than a clear picture of a global economy that is either weakening or strengthening. Given the elevation of inflation and the fact that central banks are raising rates and that a number of manufacturing sectors have been quite weak, it is surprising that there is so much resilience in the leading economic indicators even across developing economies. It does not look as though the die is yet cast for what the future will look like although data from the U.S. continue to show stubborn inflation and despite some strong job market data there has also been a significant rise in the United States unemployment index that has yet to raise any eyebrows. This is clearly a time for vigilance and to be nimble about creating outlooks and investment strategies for the times. The times clearly are changing. Unfortunately, it is hard to tell exactly how the times are changing, but there is a great deal of turbulence and a lack of uniformity. This is what calls for open-mindedness and nimbleness on the part of investors.