Pulling the Eurozone’s Strings

All eyes have seemingly been on Greece’s political wrangling. But there’s been a good bit of positive—at least better than expected—economic data lately. As we wrote Wednesday, eurozone economic growth was surprisingly resilient—overall flat in Q1—buoyed by a strong German showing. Although the figures are still subject to revision, the data showed core eurozone countries are much healthier than many feared—helping drag the weaker periphery countries along. Similarly, Japanese GDP data surprisingly accelerated to a robust 4.1% annualized rate in Q1, fueled by strong domestic demand and government spending.

US GDP growth was a fine 2.2%, and expectations broadly are for continued growth through 2012. However, the US Leading Economic Indicator (LEI) index fell slightly (-0.1% m/m), though was still up 1.9% y/y. Keep in mind, LEI is decent but not altogether perfect as a forward-looking indicator. LEI derives its value from 10 key variables, including employment data, spending results, manufacturing, stock prices and consumer sentiment. Some variables are truly forward looking—for example, stock prices. Others are more coincidental, like consumer sentiment. Still others are downright backward looking, like employment data. And April’s LEI drop was driven in large part by a backward-looking uptick in jobless claims.

As we’ve writtenbefore, jobless claims are volatile but also not reflective of future economic conditions. Also contributing was a decline in building permits. However, housing has been a weak spot throughout this expansion, so that shouldn’t be terribly surprising, nor does it say much about future economic growth. Further, it’s normal for LEI to tick negative frequently through an expansion. In our view, this is likely normal volatility, not the beginning of a downward trend.

It’s important to note, no one metric or indicator gives a perfect picture of the economy. For example, the Philadelphia Fed Manufacturing survey for May unexpectedly showed contraction for the first time in eight months. However, that report contrasted starkly with unexpected acceleration reported by the New York Fed in its region.

Taken together, though the eurozone has been weak (in aggregate, not as weak as many feared), global economic metrics continue pointing to growth.