The global economy appears to be stabilizing according to a research report by the Goldman Sachs Global Economics team. To monitor whether economic data are indeed improving they have developed a simple diffusion index, recording whether a particular data series has increased or decreased relative to its previous reading. Thirty-four monthly economic data points from the US, Europe, China, Japan, Brazil, Russia, Korea and India are analysed, including manufacturing and non-manufacturing surveys, consumer confidence indices, industrial production, retail sales, jobless claims, housing data and some credit-related data.
After having languished below 50 since the spring of 2007, the Diffusion Index increased above 50 in February and March (March doesn’t yet contain all 34 indicators, though). Any reading between 0 and 50 indicates the data are deteriorating, whereas above 50 implies improvement.
When looking regionally, the economists believe the worst of the cycle has been seen in the US and the UK, but this does not appear to be the case in Euroland and Japan.
The team concludes: “Some of our other proprietary indices are picking up. Our Global Leading Indicator has improved in March and momentum has been improving for the last three months. Our Financial Stress Indicator also improved. If these signs of improvement really set in we should expect:
• stronger performance from equities;
• cyclical sectors to outperform;
• softer performance from government bonds;
• strong outperformance of equities versus bonds, and
• higher commodity returns, particularly industrial metals (copper).”
Source: Binit Patel and Kamakshya Trivedi, Goldman Sachs – Global Economics Weekly, April 8, 2009.