Assessing the true position of the economy

With so much information available on the Australian economy, one might reasonably think that it would be a relatively simple task to judge how well it is travelling.

The data on retail sales, consumer sentiment, building approvals, several readings of house prices, inflation, job advertisements, business expectations, employment and credit are just a small sample of the news that is available to analyse and judge whether the economy is strong, weak or somewhere in between. In addition to this hard economic news, financial markets trade virtually around the clock and swings in stock markets, commodity prices, the yield on bonds and foreign exchange markets are also vital elements determining the health of the economy. Despite this information overload, it is often difficult to accurately assess the true position of the economy. There are many reasons for this. Some indicators could be strong at the same time others are weak. Think of housing construction and house prices, which at the moment, are booming, versus mining investment and commodity prices, which are extremely weak. Throw in reasonable increases in retail spending, low wages growth, a big lift in export volumes and the picture of the economy takes on the characteristics of a Kandinsky masterpiece. Circles and lines and a palette of colours that you can stare at for hours and still not find the heart of the picture. Another factor complicating the analysis of the economy is data timing. Consumer sentiment data is out every week, which provides a contemporary snapshot of a small part of the economic picture. The data for employment is released within two weeks of the reference month, which is one reason why the monthly labour-force news is such a high profile indicator for policy makers and market analysts. Labour market data is usually an early guide to changes in economic conditions. The quarterly national accounts are issued with a long lag. They are not released for at least two months after the reference period – that is, the March quarter GDP result was not known until early June. This means that for the period up to early June, Treasury, the Reserve Bank and everyone else interested in trying to work out the big-picture view of the economy was relying on news on that was half a year old, the GDP information for the final three months of 2014. In the period through April and May, the RBA cut interest rates and the government delivered its budget. These important policy decisions – as they almost always are – were based on a pot pouri of partial news for the first third of 2015 and only hard data for the whole economy up to the end of 2014. The other issue, which makes reading the economy difficult, is the inherent volatility in most economic indicators. Growth in retail spending was very weak in August last year and then boomed in September. What was really going on? Was it simply that one of the large retailing firms lodged their data to the Australian Bureau of Statistics on the first of the month rather than the 31st and in reality, growth was fairly even? The recent labour-force data is another case in point. In April, employment was initially estimated to have fallen 2,900 people with the unemployment rate flirting with a 12-year high of 6.2 percent. In May, employment rose a stellar 42,000 and the unemployment rate dropped to six percent – great news, but only if the next month or two follow up with similarly solid data and are not replaced with a zig-zag fall. And then there is the other complicating factor – revisions as the ABS incorporates new inflation into the data. The April labour force data referred to above was revised last month to the point where employment fell 13,700, not 2,900, and the unemployment rate was 6.1 percent, not 6.2 percent. These sorts of revisions can provide a very different backdrop to any analysis of the performance of the economy. Which all goes to the critical point – economic forecasting. If even the best and brightest economists find it hard to be sure where the economy is at any given point in time, how can they possibly expect to be sure about the economic outlook? This complexity will not stop policy makers and market economists trying to work out the next significant turning point in the economy. Nor should it. But it needs to be at the back of one’s mind when some heroic forecasts are presented and run with by the media. A 2016 recession anyone? Stephen Koukoulas is the Managing Director of Market Economics @The Kouk

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