Monday, September 8, 2008

According to the OECD, US economic prospects are better than Europe’s

The Organisation for Economic Co-Operation and Development (OECD) released its leading indicator index on Friday. The components included in the index measure activity in housing, financial markets, industrial production, labor markets, etc, to identify cyclical fluctuations in the overall economy (not unlike the BEA’s leading economic indicator measure).

The chart illustrates the OECD leading index for the following three regions: Euro area (Austria, Belgium, Finland, France, German, Greece, Italy, Ireland, Luxembourg, the Netherlands, Portugal, and Spain), the Major 5 Asian countries (China, India, Indonesia, Japan, and Korea), and the United States. As it is named a leading indicator, I see it as more of a coincident indicator because the index is just an aggregated value of components already known, but this is what the index shows.

First, US recessions (slowdowns) usually coincide with contractions for Europe and Asia. According to the July index values, Europe is in a strong slowdown, the Major 5 Asian countries are showing signs of a downturn, and the US is slowing further.

Second, Europe is in much worse shape than is the US or Asia. As I have argued previously, the European Central Bank (ECB) has not eased at all, leaving its regional economies naked on a crowded beach. Unless the ECB eases, which I do not expect it to, money will be tight, mortgage rates will remain high, liquidity will remain sparse, but inflation, in theory, will recede.

The ECB made a mistake by not easing early on. It grossly underestimated the effect that the US slowdown was going to have on the price of oil. Trichet should have eased early in 2008, as did Bernanke, because oil prices did, and always have, fallen precipitously. According to the OECD indicator, it’s already too late for Europe; any easing now will take up to 1.5 years to filter into the economies and promote stronger growth.

Please leave your comments. Rebecca Wilder

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