Economy in Brief: August 2022

The OECD metrics this month show a broad tendency for growth to slow down. In July, the overall OECD measure saw month-to-month declines of 0.2%. It also saw the seven-economies measure fall by 0.2%, the euro area metric fall by 0.2%, and the U.S. measure fall by 0.2%. However, the LEI reading for Japan is flat on the month, the same as it was in June.

Over three months, the LEI growth progression shows declines between 2.4% for the euro area and 2.1% for the OECD overall while Japan logs a number that is the strongest in this group at minus 0.2%. These are annualized growth rates over three months.

Over six months, the metrics range from annual growth is weakest in the euro area at minus 2.5% but for all the OECD the figure is as strong as minus 2%. Japan's reading comes out flat over six months.

Over 12 months, all these areas show growth in the LEIs that range from a low of 2.3% in Japan to a high of 3% in the euro area and in the U.S. So, what we see is a pattern a year ago where the OECD leading economic indicators were growing nicely and then six months pass and there is widespread weakness in the OECD area and over three months that weakness sustains itself.

The percentile standing of the OECD indexes in their level form for all the OECD areas we've just mentioned are in the lower 20th percentile of their respective ranges apart from Japan that has a 62nd percentile standing.

The chart for Japan's economy watchers index and components underlines the volatility in the underlying economy and in the outlook since the Covid virus struck. Looking at that chart before Covid, the moves in the current index and in the future index appear calm and trend-related compared to what we have been seeing since early-2020. Just the shortest bit of time and looking at this chart of these time series makes it quite clear that something very different happened and continues to be an operation. From June 2020 to July 2002, volatility in the current index rose by 90% compared to the earlier period from Jan 2014 to Jan 2020 before Covid.

Japan's current economy watchers index has dropped to 43.8 in July from 52.9 in June. The three-month changes is a decline of 6.6-points, the six-month change is a 5.9-point rise, while the 12-month change is a 4.2-point drop. The standing for the current index is at its 34.8 percentile, just outside of the lower 1/3 of its historic queue of values. This is a very low reading. Among the surveyed sectors, retailing with the standing in its 40.9 percentile is the relative strongest with the reading on the job market at its 39.7 percentile mark close behind. The weakest sector right now is eating and drinking indicating the lingering impact that Covid fears have had on Japan’s economy in addition to concerns about growth. The reading for eating and drinking establishments, fell from 62 in June to 30.8 in July.

Japan's economy watchers future index also is weak; it fell in July to 42.8 from 47.6 in June. That index has a 21.5 percentile standing, a standing near the boundary of the lower one fifth of its historic queue of data. The future index is down by 7.5 points over three months, up by 0.3 points over six months and lower by 4.5-points over 12 months.

The strongest reading in the future index is for employment at a 35.2 percentile standing, followed by a 34.4 percentile standing for eating and drinking places. This seems to underscore that the current ranking for eating and drinking places is so weak it is viewed as temporary so that a future rebound is expected. The weakest readings in the future index are for housing in its lower 10-percentile followed by services in its 13.4 percentile.

The economy watchers index is clearly emanating weak signals and signals that have weakened sharply over the last three months.

The July reading of the economy watchers survey both current conditions and for the future index underscore difficulties in the Japanese economy. However, because of the choppy nature of both the current and the future indexes, we can't be particularly sure that this is a reliable reading. These readings seem to chop up and down over very short periods; we will be open the possibility that there could be a rebound next month. That's not a forecast; it's just an interpretation of the time series and its recent behavior. If there is another weak reading in a month, that will start thinking that it's more of an authentic sign of weakening in the economy. For now, we simply can't be sure. However, in the context of the global environment, in the context of what's going on with Japan's main trading partners, and in the context of the heightened geopolitical risk, there's every reason to think that these weak readings for the current index and for the future index may in fact be real.

Japan's leading economic index in June slipped to 100.6 from a level of 101.2 in May. May, in turn, had slipped from a level of 102.9 in April.

The leading economic index, which is an index that tries to look at currently available economic data and assess what it means for future economic performance, declined at a 0.8% annual rate over three months, at a 4.4% annual rate over six months and at a 2.8% annual rate over 12 months. However, because of the timing of the pandemic, over a 24-month period, the index is up at a 21.5% annual rate.

Clearly Japan is solidly in the recovery from COVID; however, it's not continuing to make much headway anymore. The sequential annualized growth rates reported above and presented in the table paint a picture of continuous slowing ahead, although the trend for the slowdown does not have a steady profile. There is a significant decline over 12 months, which worsens over six months, and then shows less distress over three months. On balance, Japan's economy is waffling and continues to get weaker; it has weakened in each of the last two months. This, in part, is because of a tougher comparison with April; in April, the leading economic index moved up to 102.9 from a level of 100.8 in March marking its highest point since December. The LEI index was last higher than its April 2022 level last in July 2021.

When the leading economic index lurches like it has been doing, its signal is less useful to markets and to policymakers.

Consumer confidence The components of the leading economic index are available as of May. They lag by one month; however, there is a related topical economic statistic that also available through June: that is the reading on consumer confidence.

Consumer confidence rose in May compared to April rising to a level of 32.9 from a level of 32, but in June it was set back to 32.2. Consumer confidence has a net gain from April over three months it's falling at a 6% annual rate; falling at a 31.5% annual rate over six months; over 12 months it's falling at a 14.4% annual rate. Like the leading index, consumer confidence is declining over 12 months, the decline speeds up over six-months, then it slows down over three months. These two indexes that draw from diverse kinds of economic data but obviously are linked to the economy suggests that there has been some widespread slowdown that subsequently dissipated. This common pattern is not simply random variability.

LEI components On a lagged basis, the inputs for the Japanese leading economic index show consistent positive changes from the interest rate spread. Loan and deposit changes are also positive although they've slowed. Starts for dwellings have positive changes over six and 12 months but a small net decline over three months. Deliveries and stockpile show month-to-month changes that are positive indicating consistent economic pressures and desires to rebuild stocks. These signals are consistent with growth. However, these metrics, while positive, have slowed on horizons of 12-months, to six-months to three-months. Export growth continues to exceed import growth in the LEI framework and there's no clear trend in that pattern.