Confusion reigns at FNB economics

Cees Bruggemans article of December 1 is a must read for those keen to get confused. While I respect Mr Bruggemans, and don’t intend offending anybody, perhaps it’s time for him to reconsider quality over quantity. Cees pumps out two articles on an average day, and this one has just crossed the line from economics to gibberish. I reckon you could spend a day or two trying to figure out the logic of why the economy is now set for a “long period of economic growth”, according to Mr Bruggemans.  Before you go off and read his article here, on a piece of paper scribble, “I am not on a different planet, I am certain Bruggemans is though, and may in fact be on set of District 9. I was on HumanAction.co.za, and want to go back there.” Seriously, you’re going to need it later.

How SA exited the recession – and how the stock market told us so

So it is official. With GDP growth of 0.9% quarterly annualised (though still 2% down on a year ago), the economy ended its recession in 3Q2009. To be precise on our Women’s Day 2009 (August 9)!

Very cute, but nobody on this planet can measure GDP that accurately, less so governmental agencies. Rest assured the Q3 GDP figure will be revised once the Q4 growth figures are released – as the Q2 figure was with the Q3 release in November. The economy isn’t a tradable asset – there’s no way of picking exact tops and bottoms of GDP.

There’s nothing strange about this [GDP growth] upturn when analysing deeper data. But really very strange when so many leading indicators did not predict such early revival.

We’ll explain why Cees finds the failure of his leading indicators very strange later on. For now, just note that Cees’ definition of the “deeper data” is really only the headline percentage changes in the various sectors from quarter-to-quarter and from year-to-year, which he runs through below.

The GDP rise was led by manufacturing. It had lurched lower in 2Q2009, thereafter lifting by 2.5% in 3Q2009, good enough to give a 7.6% quarterly annualised gain.

Whether this was final demand, inventory or export driven was more difficult to discern. Some of the exceptional export falloff was being reversed by 3Q2009 (steel and ferrochrome furnaces being switched back on again).

There probably also was inventory payback, going by BER business opinion surveys. Retailers and others had run down inventories in 1H2009, starving manufacturing new orders, but then letting up and boosting orders anew.

We know electricity (+4%) continued to recover nicely, construction (+6%) was still going (but disappointingly losing momentum) while the public sector (+5%) kept hiring strongly. Even communication/transport (+1%) did not disappoint.

It could all have been even stronger, if it wasn’t for agriculture (-10%) and mining (-6%) disappointments.

One-third of GDP (retail, wholesale, motor trades, financial services, business services, real estate) all still functioned as drag anchor (-1% to -1.5%), indicative that whatever it was, domestic final demand wasn’t really doing the driving.

Does this “deeper data” convey to the reader a deeper understanding of the state of the economy? Didn’t think so. Cees talks about domestic final demand, but doesn’t once make a distinction between public and private sector final demand. The driver he fails to point out was the autonomous spender in the spirit of Keynes: the government. Private sector demand continues to be weak, while the government has more than offset the slack. This is a major distinction, and should be highlighted more prominently – particularly as the money the government is spending must come from somewhere, and will become a drag on economic growth in the future.

Now onto Bruggeman’s leading indicators, which is where the confusion sets in. First off, the equity market.

But was 3Q2009 recession exit a surprise in other respects? Our traditional lead indicator (share prices) had revisited its cyclical low by early March 2009, thereafter starting a long and dizzy climb.

A five month lead from the JSE All Share Index is a short fuse, really. We would expect a bit more warning, six to nine months at least before the economic upturn proper shows itself.

But then our equity rally was mostly driven by global appetite, explaining the lateness of the start (the JSE ultimate low point was November 2008 while the world panicked for much longer), but also its startling speed of recovery (the world eventually unwinding a mistake, joyfully responding to synchronised policy action).

So, yes and no, the stock market gave us plenty warning that GDP revival was coming.

More surprisingly, the Bank leading indicator only bottomed in April 2009. With a traditional six to nine month lead, it suggested 4Q2009 at the earliest for recovery to commence.

I’ve covered the fundamentals of the Rand and JSE rally before, and it seems Cees is missing the point (and hasn’t read my post!): the stock market rally is not a result of improved economic fundamentals in anticipation of higher earnings. The financial markets are and have been detached from the real economy in recent months and years, and while this condition holds (which I expect will be for a long time still), it will continue to mess up the equity market’s usefulness as a leading indicator.

Next leading indicator: Consumer and business confidence.

Just as surprising, the RMB/BER business confidence index this time turned up a quarter AFTER our GDP did rather than leading by at least a quarter (rising from a cyclical low of 23 in 3Q2009 to 28 in 4Q2009).

This could indicate that conditions locally also snapped back from their remarkable suppression late last year more abruptly than expected, possibly surprising many businesses expecting a more gradual playout to deep cyclical hits.

If so, it would be in line with global experience where many were surprised on the way down late last year, but were just as much surprised when things started snapping back (undoing the earlier mistaken panic reactions and positively responding to supportive policy actions, recognizing the worst wasn’t going to happen).

The even stranger bird in that lineup was FNB/BER consumer confidence, reaching a cyclical low of -six in 2Q2008 (a very long 18 months ago), admittedly under rather extreme circumstances (the stock market had tanked, Eskom had switched off the lights and the Bank was applying thumbscrews with great conviction).

But once the Eskom shock had passed, consumers settled down to a very comfortable NEUTRAL condition (straddling the 50/50 line dividing optimism/pessimism) while the world headed for financial disaster, the economy entered prolonged recession, the rand and the stock market dived and the Bank kept on cautiously piling on pressure.

Indeed, for most of 2009 the consumer kept signalling a gradual sense of improvement ahead, confidence reaching +1 in 3Q2009, with especially forward-looking components (own finances, the economy) suggesting improvement.

Sorry, I couldn’t help but bold the number of surprises contained in these paragraphs. I warned you might get lost in this article – a place where I think Cees still is. It shouldn’t really be surprising or a strange bird that consumer and business confidence indices can be misleading as leading indicators. Like Freeman explained recently, “Economic ‘confidence’ is a lagging indicator, so at best it tells you what you’ve just experienced, rather than where you’re going.” Furthermore, if consumer- and business confidence were reliable indicators of economic growth, what is the use of an economist? Surely then the majority of consumers and business people already know where the economy’s headed. Uhm thanks Mr Economist, but you’re fired.

The next long expansion has begun. Better get  your head in gear. [Article ends.]

But find your head first. So after waffling about being baffled about where the demand came from that drove GDP growth, and how it’s strange that consumer and business confidence failed to correctly signal GDP growth in Q3, and how the equity rally has been way too short to confirm the GDP growth figure there is really only one phrase that comes to my mind to sum this article up:

Excretum tauri cerebrum vincit.  Even the author’s.