A chilly pepper by any other name is still a ……..
A debate of sorts is developing between conventional economists and market analysts. Conventional economics use the widely accepted definition of a recession as two quarters of GDP contraction (so-called negative growth), while analysts, who need to be pro-active and react fast to market conditions, want to know in advance what the probability of a contraction is.
The Economic Cycle Research Institute, based in New York, featured in a Bloomberg interview on Tuesday. Going under its acronym ECRI, this group of researchers has an impeccable history of accurate market analysis, and reliable forecasts. Its forte is leading indicators, a niche it has commanded since the 1960’s. On its website ECRI makes this telling statement: “Unlike mainstream economists, who base their forecasts on econometric models, we have developed a robust leading indicator approach which is unrivalled in accurately calling turning points in economic growth and inflation worldwide.” ECRI is quoted weekly in the mainstream financial media.
ECRI has maintained since early this year, a recession in the US economy is immanint. During the Bloomberg interview, its CEO highlighted several aspects which convince him and his team that their leading indicators are correct in calling a recession. But the most chilling aspect, to me, was the confident call that a recession in the US economy has already begun.
This is where I picked up on the definitional difference between ECRI and academic economics. As national accounts go, quarterly figures are implicitly delayed, and the preliminary versions are invariably adjusted, even as much as two quarters later. This is not the result of data manipulation but rather what happens when complex models depend on huge amounts of data. Inevitably, all the required data for a full statistical analysis is not available at once, so analyses and models are adjusted as and when more data reaches the compilers.
Every year we experience a similar process as the national accounts are first released as a preliminary version, and then adjusted as the data sets grow. We only have a full set of consolidated national accounts by August or September, and even these get adjusted for the budgetary process in the next financial year.
ECRI with its leading indicators, is somewhat of a different animal, but one that has established a reputable track record.
The fundamental problem with leading indicators is that they are mostly sentiment-based. This means they test expectation and are therefore prone to inaccuracy due to shifts in sentiment. But sentiment is exactly what markets function on to a large extent, so the importance of sentiment cannot be over-emphasised. Therefore, developing a set of measurements of something as tenuous as sentiment, takes a keen insight and a very long history of engagement in this activity. The only proof is historic, meaning the accuracy of a leading indicator is only determined after the events have transpired.
But ECRI maintains that Manufacturing and Trade Sales peaked already in December last year, and that it has been tracking downwards since. Regardless of conventional definitions, they say an economy where companies post profits but consumers are lagging in terms of income growth, employment, prospects and prosperity, has effectively stopped functioning as an economy for consumers. US GDP per capita in 2003 was US$41,844 per annum. Today it is basically back to that same level after peaking in 2007.
ECRI’s view on the relevance of growth is strikingly similar to our domestic situation. An economy that posts a GDP growth of more than 6%, but where inflation erodes disposable income, and unemployment shoots through the roof, is not an economy for its citizens. It is rather futile to book impressive growth figures, making the macro economic side look good, while this growth is based on government spending, or on the distorting impact of single mega-investments.
Growth needs to be on the ground. It is by necessity a consumer issue. And I am not advocating that we suddenly transform into a consumer society, but I realise the long-term risk of being overly dependent on exports. This is exactly what we are.
Nobody argues against our intended industrialisation programme but it needs to take account of growth in personal incomes across the entire spectrum of the working population. It also must take into account the contribution consumer spending makes to economic activity and expansion.
Growth in export volumes is meaningless if people do not have jobs.