This morning has seen several of the themes of this blog illustrated by the data output on the UK economy from the Office for National Statistics. The major theme at play is that we often know much less than we like to think with a subplot that the measures and indicators used can tell different tales, sometimes very different ones. The unreliability of even and in some cases, particularly, official statistics has been a theme of the credit crunch era. Unfortunately they have over the last twelve months been joined by business surveys such as purchasing managers indices (PMIs). These were having a good credit crunch as their timely nature combined with a fair degree of accuracy. This was until last autumn when regular readers will be aware that the manufacturing version for Ireland promised growth just as actual recorded output fell off a patent cliff (the cholesterol drug Lipitor in this instance).
What did we learn?
The lesson provided was that there was the danger of counting each production rise or fall as equal (an uptick or a downtick) when some are much larger in size than others. This was exposed as a flaw in the PMI methodology. Perhaps the biggest surprise was that it had not happened before.
This is in the middle of a considerable boom according to the PMI survey.
At 56.7 in September, the seasonally adjusted Markit/CIPS Purchasing Manager’s Index remained in expansion territory for the sixth successive month and was little-changed from August’s two-and-a-half year peak of 57.1 (previously reported as 57.2).
So powering ahead compared to our recent travails and in fact for quite some time.
Manufacturing production expanded for the sixth consecutive month in September, with the rate of increase staying close to August’s 19-year high.
As you can see the impression was created that there was quite a boom going on.
The British Chamber of Commerce joins the party
Only yesterday we were told this in its quarterly economic survey.
Manufacturing sector showing improvement, with six balances at all time highs…….We are pleased that confidence in the manufacturing sector has fuelled a temporary growth spurt….
Its Director General John Longworth chose to emphasise this.
It is fantastic to see our small yet dynamic manufacturing sector doing so well, with our results suggesting a recent growth spurt.
What were the actual output numbers?
You may well already be expecting quite a divergence and you would be correct to do so. From the Office for National Statistics and the emphasis is mine.
Total production decreased by 1.1% between July 2013 and August 2013. There were downward contributions from all four main sectors, with manufacturing decreasing by 1.2% after two consecutive increases.
Oh dear is down the new up yet again? Is a contraction a “growth spurt”? After all if a 1.2% decline really is the best for nineteen years we are in a real mess rather than a mini-boom! It also looks as though the decline was rather widespread.
The main components contributing to the decrease in manufacturing between July 2013 and August 2013 were the manufacture of basic pharmaceutical products & pharmaceutical preparations; the manufacture of computer, electronic & optical products; and the manufacture of food products, beverages & tobacco.
Accordingly there needs to be some surprise that the PMI survey did not pick this up in any meaningful way. After all a reading of 57.1 indicated exactly the reverse.
Unsurprisingly the year on year numbers were a disappointment too.
Production output decreased by 1.5% between August 2012 and August 2013. This decrease reflects falls of 0.2% in manufacturing (the largest component of production), 10.1% in mining & quarrying and 3.5% in the electricity, gas, steam & air conditioning sector.
However we did learn a couple of things here. Firstly slightly more optimistically manufacturing is near to growing on a year on year basis. Secondly if you take a glass half-full approach, UK industrial output is being dragged down by declining North Sea Oil output which fell by 17% on a year before. Of course there is also a glass half-empty issue which is that this is an ongoing problem for UK production and hence economic growth.
Making some sense of it all
At first it look as if there are a lot of fans of one particular Talking Heads album around.
Stop Making Sense
Whilst that is a recommendation followed by many these days especially politicians, there are some clues as to what is really happening if we look hard enough. Firstly the recent atmosphere surrounding the UK economy had become like the advertisements for the soft drink Cresta which was popular when I was a child which had a large bear opining.
It’s frothy man!
Expectations for economic growth in the third quarter had risen as high as 1.2% on a quarterly basis being fed by optimistic surveys. Whilst this exhibited a type of bubble economics there are still reasons to think that the UK economy is growing and perhaps at a decent lick.
The quarterly production figures (adding up the latest three months) do look a lot better with industrial production rising 0.5% and then 0.8% in the first two quarters of 2013 and now rising 1.1% in the latest three months. If we switch to manufacturing production we see that the latest three months are up by 0.6% on a year ago with the star performer being shown below.
The largest upward contribution between August 2012 and August 2013 was from the manufacture of transport equipment, which rose by 12.5%. The majority of this strength came from the manufacture of motor vehicles, trailers & semi trailers.
Although as ever in this yin and yang world another report from the ONS suggests a troubling issue.
Manufacturing companies’ net rate of return was estimated at 7.2% in quarter two 2013. Along with quarter one 2013 this is the lowest level seen since quarter one 2003.
The Trade Figures
These have been a perennial problem for the UK and if they were a flower would be described as an extremely hardy perennial.
The deficit on trade in goods increased by £1.4 billion to £27.7 billion in the three months to August 2013 from £26.4 billion in the three months to May 2013.
So an existing problem which was large enough may be getting even worse. Also there is an added disappointing kicker in the detail.
Exports of goods in the three months to August 2013 decreased by 1.2% to £76.7 billion
And frankly a phrase which the UK reads much too often.
Imports of goods on a three month basis now stands at a record high.
Mind you that does mean that we are a good global and indeed European citizen as we boost plenty of other economies with our spending. Please remember that when there are threats that other countries would stop trading with us, if we do not do what they wish!
You may have noted that I have so little faith in monthly trade figures that I have quoted the quarterly ones above! This poses the question as to whether industrial and manufacturing production numbers deserve the same treatment? There are two catches in travelling that road. Firstly it will be even longer before we learn anything about what is happening in the UK economy and secondly there is no reason why production numbers cannot be measured monthly fairly accurately. There is also an enormous irony here as economists such as Danny Blanchflower are pressing for monthly unemployment numbers to replace the three month averages we currently receive.
However the business surveys cannot escape criticism here either as unless the official numbers are appallingly inaccurate their optimism now looks somewhat Panglossian. In a way Markit have admitted this this morning with this tweet.
You may note that an optimistic “if” is required to get us back to a timescale some 16 years shorter than the one they posted in their original update. However to give them credit they do at least join the debate and make their case even when the going is tough.
Finally to answer the question posed in the title of this post then it is a big problem for those who have rushed to join the “up,up and away” scenario for the UK economy. Yes the economy is growing and yes we are in a mini-boom but many of the age old problems remain. One of them, our newly recreated obsession with basing our economy on a boom in house prices was the subject on here only yesterday.
On a lighter note I did have a wry smile at this from the British Chamber of Commerce.
For this reason the survey is closely watched by policymakers such as the Treasury, the Bank of England and the new Office of Budget Responsibility.