Guide to Economic Indicators
Page 11
American capacity use exceeded 90% during the Korean and Vietnam wars, but it has been below 90% since 1967; in 2009 it dipped below 70%. A figure of 88% overall would indicate severe strains (but 88% would be normal in certain individual industries which operate a high level of capacity use, such as paper and pulp).
Surveys
In most other countries measures of capacity use are derived from survey evidence (see Business conditions, page 115).
Defining terms such as “capacity”, “satisfactory” or “normal” is left to respondents. Accordingly, survey results are better for examining short-term rather than long-term changes in capacity use.
Manufacturing orders
Measures: New orders received by manufacturing companies.
Significance: Indicator of output in the near term.
Presented as: Money, index or percentage balance form.
Focus on: Trends.
Yardstick: Total orders can change by 10–20%. Generally the higher the better, but watch for bottlenecks and inflation.
Released: Monthly, 1–2 months in arrears; revised.
Overview
The US Census Bureau publishes new orders received by manufacturing companies and their unfilled orders in current dollars, with an advance report on orders for durable and a more detailed report including non-durable goods about a week later.
The German Federal Statistical Office publishes volume index numbers for manufacturing orders, distinguishing between domestic and foreign orders.
The Confederation of British Industry publishes survey results indicating the percentage of respondent companies which think that order books are above normal less the percentage of companies reporting below normal order books. This subjective assessment is broken down into domestic and export orders.
Manufacturing orders ripple through the economy. An order for a washing machine may prompt an order for a metal pressing which in turn will provoke an order for sheet steel. Each order will reflect the output price, while manufacturing output and GDP will rise by the value-added component only. Orders are therefore much more volatile than manufacturing production.
Total orders
Buoyant order books indicate upward pressure on employment and output over the next few months. This is basically good, but it may suggest: a rise in inflation if unemployment is low; capacity use is high; there is an order backlog (orders are high in relation to shipments or sales); and/or inventories are low. Strong orders will also tend to increase imports of materials and intermediate goods, but this may be offset by exports (see below).
Orders provide an early signal of changes in the economic cycle. A rise in orders may indicate the end of a recession; a fall may indicate that the cycle is peaking.
Where orders are presented in value terms they should be adjusted for inflation. Producer prices can be used. If orders rise by 6% in value and producer prices increase by 4%, the volume of orders is about 2% higher. It is important to ascertain that this adjustment does not reflect, say, a movement in refined oil prices, which are erratic and can falsely suggest changes in the volume of new orders. There may also be other blips. In the American series the transport component jumps by perhaps a third in a month when new aircraft are ordered. Try to use a series which excludes misleading influences.
Domestic orders
Domestic orders by sector are indicative of the structure of home demand. Bigger orders for capital goods suggest more investment activity and more output in the future. Machine tool orders sometimes receive special attention: an increase is encouraging because they are used to manufacture yet more machines which in turn make more goods.
Defence orders tend to reflect political decision-making. If they are identified separately, as they are in America, subtract them from capital or durable orders to get a better feel for underlying demand.
Orders for durable and capital goods react to changes in the economic cycle ahead of other orders. Orders for consumer goods are obviously indicative of trends in the consumer sector.
Manufacturing activity
Surveys of purchasing managers indicate that manufacturing industries in most of the world’s big economies are growing. In big emerging economies such as Brazil, China and India, the indices compiled by Markit, a provider of financial information, were well above 50 in January, indicating robust growth. In each of those countries manufacturing was still shrinking in January 2009. There has also been a pronounced turnaround in America, where the Institute for Supply Management’s index for January was 58.4, in contrast to 35.5 in January 2009. Manufacturing is also expanding in Germany, France and Britain. But it is still shrinking in Greece and Spain, though much less markedly than a year earlier.
Manufacturing activity
*Based on a survey of purchasing executives. A reading above/below 50 indicates the manufacturing economy is generally expanding/contracting compared with the previous month Sources: Markit; ISM
The Economist, February 4th 2010
Export orders
Orders from overseas reflect export competitiveness (see page 168) and the economic cycle in overseas markets. A rise is good, but see comments above about inflation. If orders are booked despite a stronger currency, profits may be squeezed and repeat business may not be sustained.
Motor vehicles
Measures: Activity involving cars and trucks.
Significance: Indicator of manufacturing production as well as consumer demand.
Presented as: Number of units.
Focus on: Trends.
Yardstick: Volatile, but a 12-month change of more than a few percentage points is worrying.
Released: Monthly; more frequently in the United States.
Overview
There are three main series relating to motor vehicles:
manufacturers’ production;
sales; and
registrations of new vehicles with national licensing authorities.
Registrations and sales are broadly similar; the difference mainly reflects the method of data collection.
The figures usually relate to the number of units, that is, volume rather than value. They may not reveal very much about the pattern of demand for cheap or expensive vehicles or about changes in quality. However, they are a useful indicator of manufacturing production; demand for a durable good which is vulnerable to the economic cycle; competitive pressures, especially between domestic and overseas producers; and import and export trends.
Interpretation
Vehicle sales are a reasonable leading indicator of economic activity. A vehicle purchased by an individual is classed as consumption expenditure. The same vehicle purchased by a business is investment spending. Generally, then, figures for cars are suggestive of consumption; light vans and trucks are indicative of investment.
Production and sales may not tally due to changes in stocks (see Wholesale sales and stocks and Retail sales and stocks, pages 128 and 129) and net exports.
Seasonality
There is a marked seasonal pattern in car sales, with turnover bunched into January and, if different, the start of a new model year or registration-plate year identifier. Discounting price wars can also shift demand into a different month from normal. Short-term figures should be interpreted with care. Take 2–3 months together and compare with similar periods of earlier years.
Table 9.2 Motor vehicle markets, 2007
Construction orders and output
Measures: Activity in the construction sector.
Significance: Indicator of new investment and future output.
Presented as: Value of orders, volume of construction.
Focus on: Trends in volume terms.
Yardstick: In OECD countries, the growth rate of real capital formation in nonresidential construction averaged 2.8% a year between 2000 and 2008.
Released: Monthly, at least one month in arrears.
Overview
There are several main series, including the following.
/> Orders (volume in Britain; value in Japan and America).
Permits issued (number in Belgium and France; value in Australia, Germany, the Netherlands).
The value of work put in place (Germany, America).
Value added in money and real terms (with GDP figures for expenditure on investment for many countries).
Construction normally covers buildings and infrastructure (such as roads and ports). Orders are sometimes based on contracting work. This may include projects such as oil rigs which really belong in manufacturing production under steel fabrication. The figures may exclude residential dwellings, so this should be checked.
Significance
Construction work is fixed investment. This boosts current-period GDP and lays the basis for future economic growth. Its share of GDP in different countries is shown in Table 8.2.
New factories and offices provide a direct foundation for higher economic output. New infrastructure improves social welfare and generally boosts productivity. The only real exception to the “future output” rule is investment in new dwellings, but this still brings benefits (see Housing, page 127).
Interpretation
Seasons and cycles
Construction work is highly seasonal and cyclical. Data are frequently (but not always) seasonally adjusted, but it is wise to take 2–3 months together and compare them with the same periods in earlier years. It is important to look out for the adverse effects of a wet or freezing month.
Construction activity is sensitive to expectations of future demand, to interest rates and to the availability of finance. Low interest rates increase the return from investment and encourage capital spending, especially when they are coupled with strong demand and high usage of existing capacity. (See also Investment, page 100.)
Orders
Construction orders signal demand for building materials and labour over the coming months (and years – depending on the size of the individual projects). Knock-on effects include implications for service industries such as architects and surveyors, manufacturers of industrial plant to go into new factories, and providers of office fittings and furnishings.
Orders are often given on a value basis. These should be adjusted for inflation to arrive at the volume change. For example, if the value of orders rises by 10% and inflation is 8%, real growth is about 2%. Producer prices might be used for deflation if there is no obviously better indicator to hand. Figures sometimes cover construction permits; these provide no guide to the size of the projects, and they might not be translated into construction activity if economic conditions change.
Output.
Construction output in volume terms helps you to judge the effect on total output. Construction accounts for about 5% of GDP, so a 10% rise in construction value-added contributes around 0.5% to GDP.
A large construction project spread over several months or years adds a little bit to output in each of several periods. (See above for knock-on effects.)
Housing starts, completions and sales
Measures: Number of new houses begun and finished; sales of new and existing homes.
Significance: Indicator of construction activity; industrial and consumer demand.
Presented as: Number of units per month.
Focus on: Trends.
Yardstick: Volatile; number of starts can change by 30% a year. In OECD countries, the growth rate of gross capital formation in residential construction averaged –0.1% a year between 2000 and 2008.
Released: Monthly, at least one month in arrears.
Overview
There are three main series indicating:
the number of residential dwellings started;
the number of residential dwellings completed; and
the number of residential dwellings sold.
Each series applies to a given period, usually one month. They are often seasonally adjusted, but it is wise to take 2–3 months together and compare with the same periods in earlier years since house building is highly sensitive to the weather.
Figures usually distinguish between public and private dwellings. Activity in the private sector is a good guide to underlying activity, but there are also knock-on effects from public-sector building.
Starts
A housing start is counted on the date that foundations are begun (not when the site is cleared). It implies a given level of demand for construction materials and labour over the next few months and a housing completion at the end of that period.
If the existing housing stock is old, there may be an element of replacement building. Generally, however, housing starts (and completions) are closely linked to population growth rates, earnings and employment, and interest rates.
Completions
A housing completion implies a house sale, a new mortgage advance and increased consumer demand for carpets, furnishings and other durables – possibly accompanied by extra consumer credit.
Sales
Housing sales are linked to the level of completions, but turnover of existing homes is more important. House prices are highly relevant. People are more inclined to move home and buy rather than rent when house prices are rising and are expected to provide capital gains. Housing turnover is also stimulated by incomes rising relative to house prices and by lower mortgage rates which encourage borrowing.
Effect on GDP
The construction of new houses is classed as fixed investment in residential dwellings. This accounts for only a few percentage points of GDP (see Table 8.2), so arithmetically a 10% rise in house building may add less than 0.5% to total output.
The sale of existing houses is a transfer of production scored in earlier periods and does not itself add to output, but real estate, legal and financial fees and commissions do, as does demand for new furnishing and other durables.
Wholesale sales or turnover, orders and stocks
Measures: Most common indicator measures sales by wholesalers.
Significance: Indicator of demand.
Presented as: Monthly index numbers.
Focus on: Rates of change in volume of sales.
Yardstick: More volatile than retail sales; look for gains of 3–4% a year.
Released: Monthly, 1–2 months in arrears; revised.
Overview
Wholesale sales (called wholesale turnover in Germany) are an important link in the supply chain. Wholesalers channel imports and domestic ally produced or processed goods through to final users. Where stocks and orders are available, these provide a useful check on trends. A fall in wholesale sales or a rise in wholesale inventories suggests or confirms slack in business and retail demand.
There are relatively few figures on the services sector, but wholesale sales provide extremely loose indicators of demand from, for example, hotels and catering establishments. They are also indicative of demand for business goods including, in some countries, building materials. Wholesale sales are a reasonable signal of consumer demand (but retail sales are better – see below).
Value and volume
It is important to watch the volume of sales, particularly for durable goods (an early indicator of demand pressures). Where figures are in value terms they can be converted to volume using wholesale or producer prices. For example, if producer prices increase by 3% and sales value rises by 5%, volume is up by about 2%.
Effect on GDP
Wholesale sales are included in the distributive trades sector of GDP. Their direct contribution is wholesalers’ value added (income from sales less the cost of purchases and other inputs).
Retail sales or turnover, orders and stocks
Measures: Most commonly sales by retailers.
Significance: Indicator of consumer demand.
Presented as: Monthly index numbers.
Focus on: Rates of change in volume of sales.
Yardstick: 3% a year is reasonable; any lower and the economy might slow down. More than 4–5% suggests overheating.
Released: Monthly, at least one month
in arrears.
Coverage
Retail sales figures provide an important and timely indicator of spending at retail outlets. Most series include VAT or sales taxes and many are in volume terms (that is, after adjustment for inflation) as well as value terms. Retail e-commerce, or business-to-consumer (B2C), estimates are published by some official statistics offices eg, Britain’s National Statistics started to issue monthly retail internet sales at the beginning of 2009.
The International Council of Shopping Centers-Goldman Sachs index tracks weekly US retail chain store sales; the John Lewis Partnership in Britain publishes weekly data for its stores.
Basis
Information is presented by type of business, rather than by commodity. For example, food sales appear under at least two subheadings: food retailers and mixed businesses. Where an establishment sells items outside its main classification, such as sales of food by a petrol filling station, these are usually excluded from the statistics. Credit sales are treated as a sale, valued at the date of the transaction at the total credit price including charges levied by the retailer.
Interpretation
Retail sales cover up to half of total consumer spending although there is not a direct correlation between the two since some items sold by retailers are bought by businesses. Nevertheless, retail sales are a key indicator of consumer confidence and demand.
It is important to focus on volume increases. Where figures are in value terms they can be converted to volume using consumer prices. Arithmetically, a 1% rise in retail sales adds roughly 0.3% to GDP, all else being constant.
Seasonality
Retail sales data are usually seasonally adjusted, but they should be interpreted with care. Promotional sales price discounting, warm weather or an expectation of increases in sales taxes can encourage consumers to bring forward their spending. An upward blip may not be sustained.
Cyclical variations
In times of financial stress consumers cut back on non-essential spending, which results in a decline or less rapid growth in retail sales. Spending on durables (items with a life of over one year, such as washing machines) goes first. For example, in Britain during the 1991–92 recession, the volume of food sales rose by 3% while new car registrations fell by 20%.