Sunday, May 30, 2004
Thrown off course by misleading signals
Posted by David Smith at 12:04 AM
Category: David Smith's other articles

For those who fear that the economy is racing out of control, official figures last week brought some reassurance. The economy grew by just 0.6% in the first quarter, revised figures showed, marginally below its trend rate of expansion.

The Bank of England, which has been getting hawkish about raising interest rates more aggressively, can apparently relax. With growth below trend and inflation below target it seems it need not trouble itself.

Except that, as the Bank's monetary policy committee (MPC) has made clear, it does not believe the figures. The subdued growth first quarter growth figures are inconsistent with other evidence, it says.

There is a pattern here. The biggest domestic economic debate has been over house prices. Throughout last year, as all the main house-price measures showed inflation easing from its earlier highs, the famed soft landing appeared to be on track.

It still is, according to the official measure from the Office of the Deputy Prime Minister (ODPM). This has house-price inflation, which was running at more than 20% early last year, down to 7.8% in March, with London rising by less than 5%.

Contrast that with data from the Nationwide and Halifax. Like the ODPM, they had house-price inflation edging lower last year. Unlike it, they both report a renewed surge in prices this year. The Nationwide says prices have jumped 1.9% this month, and are 19.5% up on a year earlier.

The Bank does not, as it keeps reminding us, target house prices. They are, however, a key ingredient in the strength or otherwise of consumer spending. If the MPC believed the official housing data it could be more relaxed about rates, and nobody would be talking about a June hike.

But, to judge from its latest inflation report, which focused only on the figures from the lenders, it believes their data. Which is right? The two sets of statistics are telling us different things. The Halifax and Nationwide compile their data on the basis of mortgage approvals. The ODPM, with a considerably larger sample, bases its figures on completed housing transactions.

The true picture, one suspects, lies somewhere in between - the housing market has perked up but the lenders' data exaggerates it. Prices are probably rising by 12%-13% rather than nearly 20%.

Housing is not the only area of controversy. The Bank's doubts about the first quarter growth figures arise from the belief that they have been unduly dragged down by weak official manufacturing data. The CBI, according to its newly-released industrial trends survey, sees manufacturing output and orders at their strongest for five years. The purchasing managers' index for manufacturing is very strong. Industry, it seems, is benefiting from the global upturn.

But the official data resolutely refuses to join in the fun. It shows manufacturing flat in January, down in February and down again in March. Output in the first quarter was 0.5% lower than in the final quarter of 2003. Were this a manufacturing-only economy, recession would be staring us in the face.

Is the official picture plausible? Probably not. It would suggest, not only that the surveys are wrong, but that an exporting nation has been untouched by the global upturn. But such data differences are worrying and potentially damaging.

My request for informal indicators to fill the gap left by such disputes over the figures and the apparent failure of my own skip index produced a flood of responses. One theory about the skip index, incidentally, is that the reason it has slumped is not that the economy is weak but that all the builders are too busy with other work.

Suggestions for alternative indicators include the "crane count", the number visible from the skyline, champagne sales (strong last year), and some of the usual suspects - the ease of getting a restaurant booking and taxi queues in the rain.

Roger Humber, ex of the Housebuilders' Federation, says a sure sign of a boom is the extent of middle-class concern over "green" issues. Other imaginative suggestions include sales of personalised car numbers, dumped mattresses by the roadside (when people like that replace their bedding things must be looking up), Chinese takeaway prices - nobody is better tuned to the market than their owners, and waiting lists for car park season tickets at popular commuter stations. Scrap prices, an Alan Greenspan favourite, are up strongly.

What all these lack, to be perhaps unduly serious about them, is anything like completeness. They may, in other words, convey accurately what is happening in part of the economy - and during times when that part is in synch with the rest will provide a useful guide to the bigger picture. But there can be no guarantee of that.

When even the GDP figures do not provide a number that the Bank can rely on, amateur statisticians are going to have their work cut out to produce something better. There is another option.

The Office for National Statistics used to publish leading indicators for the economy but stopped doing so as a result of spending cutbacks. Now that task is performed by NTC Research, which produces the old official leading indicators, and Lombard Street Research, which has its own set.

There is no mystery about leading indicators. They are made up of freely available information which leads the economic cycle by a short time, for example consumer credit, new car registrations, consumer confidence, CBI new orders, or by a longer time - 12 months or more - for example housing starts, interest rates, business optimism and the financial surplus or deficit of firms.

The virtue of leading indicators is that they combine different data to produce a coherent whole. I intend to return to them on a regular basis. The message from the shorter indicators is that we shall see strong growth over the next 3-6 months. The longer leading indicators are telling us growth will continue strong into next year. Whether that is enough to prompt a June rate rise from the Bank I shall discuss next week.

PS Many people will have awoken last Sunday morning to two alarming bits of news. The first was that the Council of Mortgage Lenders (CML) was calling for a doubling of interest rates to cool the housing market. The second was that Oliver Letwin, the shadow chancellor, had a secret plan to slash up to 150 billion off government spending. Both good stories, except for one thing. They were complete nonsense.

Anybody familiar with the CML would know for them to call for a doubling of interest rates would be like the Federation of Master Butchers demanding a ban on meat-eating, or the Glass and Glazing Federation wanting the return of the window tax. The CML is predicting a rise in base rates to 5.25% and a slowdown in the housing market.

So where did the doubling come from? The organisation was responding to suggestions that rates should be increased aggressively to produce an immediate cooling of the housing market. To do this, it said, rates would need to be doubled, which was plainly out of the question. So, no call and no prediction. The Sunday newspaper that originated the story did not even have an interview with Michael Coogan, the CML's director-general, as it claimed.

The other nonsense was the claim - ramped up by the Labour party - that Letwin, "talking privately to a group of economists", had been taped letting slip that he wants to cut government spending to 35% or 30% of gross domestic product. At this public meeting, attended by several journalists including me, the shadow chancellor let slip no such thing. In fact, while he came under pressure to be more radical on spending, his talk was all about why he would resist such pressure.

Gresham's law, that bad money drives out good, is well known to economists. It seems to apply just as well when the currency is dodgy stories.

From The Sunday Times, May 30 2004