Behind the gloomy headlines, today’s update of the OECD’s leading indicator indices suggests that global economic weakness is abating, consistent with an earlier improvement in monetary trends.
The forecasting approach employed here relies on the Friedmanite rule that changes in the real money supply lead economic activity by about six months. Confirmation of the message from the monetary data, however, is sought from an indicator derived from the OECD's country leading indices. This transformed indicator provides an earlier signal than the raw indices, with a typical lead time of about three months.
Six-month expansion of the global (i.e. G7 plus emerging “E7”) real narrow money supply slowed in late 2010 and early 2011, warning of current economic weakness. It has recovered, however, since May, consistent with economic momentum bottoming in November. Confirmation of such a scenario required an upturn in the G7 plus E7 leading indicator. This was duly delivered in the September update released today.
The leading indicator, admittedly, remains in negative territory, implying that economic news will remain soft into year-end. One of its advantages, however, is that trend changes tend to be sustained – there is a good chance that the September improvement will be followed by further gains. This would be consistent with the steady acceleration of real money over the summer.
The G7 / E7 breakdown of the indicator shows, unsurprisingly, relative strength in emerging markets – the E7 component rose for the fifth consecutive month in September. Interestingly, this continues a recent pattern of the E7 indicator leading changes in G7 momentum and suggests that these economies are now playing a driving role in the global cycle.
Rises in the leading indicator tend to be associated with stronger investor risk appetite – the September increase is consistent with recent better equity market performance.
The E7 indicator is at a level suggesting a rise in emerging market equities.
The pick-up in the E7 indicator mainly reflects the dominant Chinese component. 
A revival in E7 momentum would be expected to be associated with a recovery in commodity prices.