Money pick-up suggests autumn trough in leading indicators
Simon Ward
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The six-month growth rate of G7 industrial output is falling sharply, as previously signalled by the OECD's composite leading indicators index and, much earlier, G7 real narrow money, M1 – see chart.
The six-month change in real M1, however, bottomed in January and had recovered to a nine-month high by July, suggesting that economic weakness should abate by the end of 2010.
In terms of six-month rates of change, real M1 led industrial output by 11 months both at the recession trough and the recent momentum peak. If the same lead-time applies from the January real M1 trough, the six-month change in industrial output should bottom in December. (The average lead historically has been shorter, so an earlier turnaround is possible.)
The OECD leading index turned only two months before industrial output at the recession trough and by three months at the recent growth peak. A December bottom in industrial output momentum, therefore, could be presaged by a trough in the leading index in September or October.
The OECD leading index is widely monitored by market participants, with a July reading due on 13 September. The above analysis suggests that this number, and possibly also figures for August and September, will be weak.
The view here remains that a "double dip" will be avoided but markets are likely to have to negotiate more downbeat economic data over coming weeks.
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