October’s Index of Business Conditions shows leading economic indicators down for third straight month

December 6, 2007
By Ken Worsley

The Cabinet office published its monthly Indexes of Business Conditions for October today, and the results hardly seem uplifting. This report generates three scores, which are referred to as diffusion indexes. The three categories reported are the leading index, the coincident index, and the lagging index. The leading index is meant to evaluate business sentiment for the future, the coincident index measures sentiment in the current period, and the lagging in the period previous to the report. For each index, a score below 50 indicates pessimism, while a score above 50 indicates an optimistic result.

In October, the leading index was below the 50 level for the third consecutive month, clocking in at 20. In September the score was at 0, and in August it was at 33.3. In the ten months measured thus far in 2007, only two have had a leading index score above 50, with June having been at 75 and July at 66.7.

The coincident index declined, although at 54.5, it stayed above the 50 line. The lagging index fell from 50 to 33.3.

Much is being made in the media over the leading index falling below 50 for the third straight month. Although this is certainly not a good sign, we should keep in mind that since June 2006, only two months have been above the 50 mark (June and July 2007).

Bloomberg states the reasons for pessimism quite succinctly:

Rising oil prices caused corporate profits to slip for the first time in five years last quarter, leaving companies with less to spend on factories and wages. Exports, the main driver of growth last quarter, may lose momentum as the global expansion ebbs because of the U.S. housing recession.

The Nikkei put it this way:

The result suggests the Japanese economy is being pressured by risk factors including high commodity prices, a decline in job offers and uncertainty over the economic outlook for the U.S. - Japan’s biggest export market.

Just a few days ago, we wondered if the business cycle might be turning, given the lackluster performance at Japan’s manufacturing firms, and what seems to be a trend toward bolstering assets in cash and deposits while a nascent trend in the reduced value of investment holdings at Japan’s firms seems to be taking shape.

Thus, we’re going to have to keep an eye on how exports go, as well as how soon the construction industry can pull out of its ongoing slump. The possibility of weakening consumer demand may also put additional pressure on the economy.

Tomorrow morning’s revised GDP figures for the July-September quarter might bring some positive news, especially if they are revised upwards from their current annualized 2.6% rate of growth. Nonetheless, the Nikkei is warning that economists see reduced housing investments, higher crude oil prices and a weak yen as risk factors that could limit Japan’s GDP growth in 2008 under 1.0 percent - and that would make for one difficult year.

Filed Under Cabinet Office, Economic Reports