OECD LEIs Continue Their Mild Backtracking

The amplitude adjusted OECD leading economic indicators in May continue to show weak conditions. The overall OECD index declined in May month-to-month. The index for the top seven OECD countries declined, the index for the euro area declined, the index for Japan was unchanged and the index for the United States was unchanged.

The OECD prefers to look at its leading economic index signals in terms of six-month changes. Viewed in that way, the OECD overall index is down by 0.5%, the index for the seven largest OECD countries is down by 0.5%, the index for the euro area is down by 0.7%, the index for Japan is flat, and the index for the U.S. is down by 0.4%. Over six months the index for China is down by 0.8%. Those figures are for six-month averages; to the right of them, in the table, we see changes over six months calculated on point-to-point data and those changes also show broad weakness and weakness that has been in train over the past 12 months (two nonoverlapping weak six-month modules in the table back-to-back).

The indicators show that growth broadly is below its steady state pace in most of the aggregate presentations. The levels of the normalized amplitude adjusted leading indicators in the bottom panel of the table, reveal readings below 100; for the month of May they indicate weakness for every country or region except for Japan and Germany; Japan and Germany are also exceptions in April. Much of this weakness came on in April since in March these same indicators show slowing tendencies in only 5 of the 12 entries in the table. However, those slowdowns were for important economic areas as they included the U.S. and China. China's 'Covid zero' policy has been a drag on global growth and has been particularly hard on Asian economies.

The queue percentile standings for six-month growth show ranked values below 50% which means below the median for five of six entries in the table with Japan being the exception. Looking at a broader array of countries and areas and applying the queue percentile standings to the levels of the indicators instead of the six-month changes, there are only three with readings above 50% indicating values that are above their historic medians. Those three countries are Japan with a standing at its 77th percentile, Germany with a standing at its 77th percentile, and France with a standing at its 50th percentile. A few countries have standings in the lower quartile of their range; that includes China and Greece as the U.K. barely escapes that designation. The European Monetary Union has a standing in the bottom one-third of its historic queue of values.

The OECD indicators are clearly indicating that there is a great deal of moderate weakness and subpar growth in train across these economies. Only a few developed economies are experiencing more extreme weakness such as China where it's Covid-zero policy is responsible for curtailing growth.

Developing economies The OECD leading indicators for developing economies show weakening in 92% of the countries in the table in May; the lone exception is Slovakia, where the index was unchanged on the month (Note I put China in both the developed and developing groups). This is a much broader deterioration than we saw in March and April when month-to-month declines were posted by 69% of the members although in April that statistic did not include any indicators that were actually rising month-to-month. In March, three of the entries in the table posted mild month-to-month increases.

Looking at the growth rates of the amplitude adjusted LEI indicators, growth weakens over three months in 77% of them, growth weakens over six months for 70% of them and growth weakens over 12 months for 61% of them. The levels of the indicators are below 100 for 69% of the respondents; that flags as subnormal growth nearly 70% of the survey respondents. The percentile standings show readings below 50 where 50 represents a median value for the LEI in 69% of the entries as well. Both techniques of evaluation produce the same conclusion - broadly weaker than normal growth.

Developing economies are broadly weaker than the developed economies and they tend to have a proliferation of lower LEI readings as well. Six of the ratings in the table for example reside in the lower 25th percentile of their respective historic queues; that's just slightly less than half of them. The highest percentile standings in the table are for Mexico at its 70th percentile, Slovenia at its 63rd percentile and Poland at its 60th percentile. India at its 59th percentile is the only other rating above it 50th percentile.

Summing up on balance, the OECD data show substantial widespread and chronic weakness. Developing economies are weaker than developed economies. Meanwhile, money center country central banks try to get a handle on a stubborn global inflation problem. At the same time, there is a threat that this situation gets much worse because of the war between Russia and Ukraine that has interrupted food supplies particularly to developing economies where the margins for survival are so thin. Russia has made the interruption of food supplies to the world a goal in its war with Ukraine. The destruction of farmland and farm equipment in Ukraine as well as the theft of grain itself not only hurts Ukraine and Ukrainian farmers but it will create great distress among developing economies. We can expect this situation will get worse before it gets better.