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Stephen Lewis: Tel (0)20 7190 7193, or
e-mail:[email protected]
Monument Securities LimitedRegistered Number: 2583440
www.monumentsecurities.com
The Economist Building25 St Jamess StreetLondon SW1 1HA
Tel: +44 (20) 7190 7222
Economic Insights 23 February 2012, No. 3808
Statistics and surveys
The German IFO survey for February yielded a business climate
index of 109.5, 1.2% higher than last months reading. This
result was stronger than markets had expected following the
decline reported yesterday in the flash Markit purchasing
managers composite index (PMI) to 51.7 this month from 52.9 in
January. In truth, it is not unusual for the results from these
surveys to diverge over the short run. There are differences in
coverage. The IFO seeks responses from companies operating in
manufacturing, construction and wholesale and retail trade,
whereas the Markit composite measure draws on a sample-
population of companies in manufacturing and certain service
sectors. But this does not fully account for the differences in
results. For the current month, the indices for manufacturing
alone, which ought to relate to coterminous categories, also
moved in opposite directions, with the IFO measure rising and
the PMI falling. Over the longer term, it is true, the two
surveys
tell broadly similar stories but, on those occasions when they
give conflicting signals, that is no help in deciding which of
them
is providing a reliable indication of the trend in the
economy.
Germany is not the only country where this problem arises. The
Bank of Englands MPC noted at its 8-9 February meeting that
there were similar difficulties in the UK. The minutes drew
attention to the sharp increases in the CIPS/Markit
manufacturing
and services indices in January. Both had been above their
series averages. Nevertheless, the strength in the CIPS/Markit
surveys had not been matched by other survey evidence; the CBI
and British Chamber of Commerce survey expectations had
both suggested a further contraction in GDP in the first
quarter. It appears that MPC members were inclined to side with
the
CIPS/Markit version of reality on the grounds that past
statistical relationships had suggested they were the most
informative
individual survey indicators of output growth, a comment that
the compilers might do well to squirrel away for future use in
their promotional material. But the clinching argument in favour
of the upbeat CIPS/Markit message on the economy, in the
eyes of MPC members, seems to have been that the UK CIPS/Markit
surveys had risen in common with those in many other
countries around the world. If that was a sound way of assessing
Januarys survey results, how are MPC members now to
interpret the downturn in Februarys flash PMI data for the euro
zone? If they are to be consistent, should they not temper
their confidence that Januarys UK surveys registered the first
phase in a sustainable economic upswing?
The MPC minutes further commented on the global PMIs that it was
possible that the CIPS/Markit surveys might have reflected
an improvement in business conditions following the ECBs LTRO
although it seemed unlikely that it could have led to a sharp
pickup in output is such a short space of time. It seems here
that the MPC was trying very hard not to deviate from the
compilers line that the survey results reflect current activity
and (apart from the services sector business expectations sub-
index) are free of expectational influences. It would seem to
follow that the LTRO could not have much impact on the January
survey results because it would not have had time to affect
positively such objective quantities as output, new orders and
employment. The upturn in PMI indices in January must, it
appears, be attributable to some other factors. However, this is
to
overlook the point that the questionnaires on which the indices
are based are filled in by people. The responses they give will
be influenced by the psychological state they are in. When they
are asked to specify whether output rose, fell or stayed the
same, they are very unlikely to find that it is at exactly the
same level as in the previous month. But it may be higher, let
us
say, by an amount that hardly makes a difference. Whether such a
situation is described as a rise in output or as output staying
the same is likely to depend on how optimistic the respondent is
feeling. In other words, it is not possible to exclude
psychological factors from this type of survey information and
the puzzle the MPC posed regarding the effect of the LTRO is
solved. It may, of course, be very useful to know whether
companies are seeing an improvement in business conditions,
evenwhen business is not actually improving. Nevertheless, attempts
to correlate the results of such surveys with past or likely
future changes in GDP are liable to lead policymakers and market
participants astray.
One problem with all business surveys is what might be termed
survivor bias. Responses are collected only from companies
that survive, that is, the relatively successful ones, not from
those that fail. Survey compilers try to control for this
possible
distortion in their results but can never be completely sure how
well they succeed. Given the logistical challenge of conducting
a survey, a greater proportion of large-company activity is
likely to be surveyed than that of small and medium-sized
companies. That may not always matter. The business conditions
facing large and smaller companies may be similar for much
of the time. However, it would be reasonable to suppose that, at
present, company size is conferring a significant competitive
advantage. After all, large companies are enjoying ready access
to sources of capital, partly as a result of the Bank of
Englands quantitative easing, whereas smaller companies remain
severely credit-constrained. Consequently, the numerical
indices constructed out of business survey responses seem likely
to be overstating the strength in economic activity measurable
by GDP. The MPC might do better to heed the qualitative reports
that the Banks regional Agents present. These, it is true,contain
few quantitative estimates of the kind that econometricians like to
play with. On the other hand, they do provide a
nuanced insight into why the economy is behaving as it is.
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Stephen Lewis: Tel (0)20 7190 7193, or
e-mail:[email protected]
Monument Securities LimitedRegistered Number: 2583440
www.monumentsecurities.com
The Economist Building25 St Jamess StreetLondon SW1 1HA
Tel: +44 (20) 7190 7222
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