OECD Leading Indicators: Signs ofRecovery

For the second month in a row there was a rise in the April estimate of the OECD composite leading indicator for all 29 countries, suggesting that, on average, the pace of economic deterioration may be slowing in the major industrialized countries. (Not all of the 29 countries have reported.)Among those that have reported, there are, however, considerable differences in the CLI's for individual countries.In general western Europe is doing better than Central and Eastern Europe. The leading indicators of Canada, Italy, France and the United Kingdom were up in March and April, as shown in the first chart. Although data for April are not yet available for South Korea, it has shown increases in its CLI in every month from November, 2008 to March of this year. The CLI's in Germany, Japan and the United States posted their first increases in this cycle in April, as shown in the second chart.

The OECD also computes composite leading indicators for six transition economies. Among them are the BRIC countries, Brazil, Russia, India and China. The CLI for China has increased in March and April, while that for India first increased in April. The CLI's for Brazil and Russia are still declining, although at somewhat lower rates.

The Composite Leading Indicators (amplitude adjusted) are the series generally quoted in the press. These are designed to provide early signals of turning points in business cycles. Their construction is complicated and a complete description of the methodology can be foundhere.Essentially, a selection is made of times series that have similar cyclical fluctuations to those of the business cycle ,but importantly, precede those of the business cycle. These series are filtered in a number of processes, de-trended and finally normalized. The normalization process involves subtracting from the "filtered " observations the mean of the series, and dividing this by the mean absolute deviation of the series, and by adding 100 to each observation. According to the OECD, their composite leading indicators provide qualitative rather than quantitative information on short-term economic movements. Four cyclical phases form the basis of this qualitative approach. Expansion: CLI increasing and above 100. Downturn: CLI decreasing and above 100. Slowdown: CLI decreasing and below 100. Recovery: CLI increasing and below 100.

The CLI's of South Korea, Canada, France Italy, United Kingdom and China suggest that these countries may to be in the early stages of recovery. United States, Germany Japan and India may be in an even earlier stage.