Analyzing the Philippines’ February Merchandise Trade: Unveiling the Impact of Statistical Base Effects on a 'Growth' Rebound

 

Facts are stubborn things, but statistics are pliable—Mark Twain

 

In this issue

Analyzing the Philippines’ February Merchandise Trade: Unveiling the Impact of Statistical Base Effects on a 'Growth' Rebound

I. Unveiling the Statistical Mirage Behind Merchandise Trade Growth

II. Export Boom? Semiconductor Up YoY but on a Downslide while Agro-Based and EDP Exports Rebound

III. Import Trends: Capital, Consumer, and Raw Materials Up YoY, Yet in Downtrend—Where Are the Investments?

IV. A Revival of the Domestic Manufacturing Sector?

V. Private Sector S&P PMI Survey Diverge from the PSA; Rising USD Peso Points to Risks of Stagflation

 

Analyzing the Philippines’ February Merchandise Trade: Unveiling the Impact of Statistical Base Effects on a 'Growth' Rebound

 

Government and media pounced on the positive YoY sign on Philippine Merchandise Trade, interpreting it as "growth."  However, filtering noise from signal tell us otherwise.

 

I. Unveiling the Statistical Mirage Behind Merchandise Trade Growth

 

Businessworld, April 12: Preliminary data from the Philippine Statistics Authority (PSA) showed the country’s trade-in-goods balance — the difference between exports and imports — stood at a $3.65-billion deficit in February, slipping by 6% from the $3.88-billion gap in February last year. Month on month, the trade gap also narrowed from the revised $4.39 billion in January. The trade deficit in February was the smallest in five months or since the $3.55-billion deficit in September last year. Outbound sale of goods expanded for the second straight month by 15.7% annually to $5.91 billion in February. This was faster than the revised 9.1% growth in January and a turnaround from the 18.3% decline in February last year. This was the quickest exports growth in 16 months or since the 20.6% surge in October 2022. Meanwhile, imports rose by 6.3% to $9.55 billion in February, ending two months of decline. This was a turnaround from the revised 6.1% contraction in January and the 11.8% decline in February 2023. Imports growth was also the fastest in 16 months or since 7.7% in October 2022. (italics mine)

 

YoY February exports grew by 15.7%, while imports increased by 6.34%, and total external trade expanded by 9.74%. As a result, the trade deficit improved by 6%.

 

Great news, right?

 

That's if you discount the overall trend.

 

In reality, February's boost was a mirage—a product of the statistical "low" base effect.

Figure 1

 

From a noise versus signal standpoint, February's USD performance only reinforced the downside drift of the nation's trend in external trade. (Figure 1, topmost graph)

 

It is no coincidence that the fall in external trade deficit has resonated with the easing of the fiscal deficit manifesting the "twin deficits."  (Figure 1, middle window)

 

The easing of public spending has reduced the "crowding effect," freeing up more resources for the market economy's use. (Figure 1, lowest chart)

 

Still, despite the imbalances from the structural shift in bank lending operations, the declining import trend demonstrates mounting strains on consumers from inflation.

 

However, both deficits translate to an economy spending more than it produces, thereby requiring borrowing to fund the savings-investment gap.

 

II. Export Boom? Semiconductor Up YoY but on a Downslide while Agro-Based and EDP Exports Rebound

 

Export boom?

Figure 2

 

Though semiconductor exports soared by 31.9% in February, export volume in USD has been down 2.14% MoM. It has been trending down since September 2023/October 2022. (Figure 2, topmost image)

 

The microchip % share of exports accounted for 44.8% in February 2024, slightly lower than 45.5% in January and substantially higher than 39.3% from the same month a year ago.

 

What other sectors grew in volume and in percentage?

 

Agro-based exports jumped 24.1% YoY, accounting for 7.2% of the total share. (Figure 2, middle diagram)

 

Electronic Data Processing exports also vaulted by 23.1% YoY, with a 7.5% share of the total. (Figure 2, lowest graph)

 

Electronic products (which include the semiconductor and EDP sectors) soared by 27%, accounting for 58% share of the total.

 

The thing is, only a handful of sectors benefited from February's export growth.

III. Import Trends: Capital, Consumer, and Raw Materials Up YoY, Yet in Downtrend—Where Are the Investments?

 

How about imports?

 

Last February, capital goods imports fell by only 3.4% YoY, while consumer goods imports grew by 9.2%.

Figure 3

 

But both sectors suffered a plunge in USD volume of 13.6% and 16.3% MoM, and they have shown signs of further weakening (Figure 3, topmost image)

 

So based on capital goods imports, the avalanche of news headlines about the proposed massive investment flows from a peripatetic leadership selling politically related investments to the US and their allies have yet to happen.

 

Still, the government reported that Foreign Direct Investment (FDI) flows almost "doubled" in January 2024, mainly from a surge of debt flows. Debt flows accounted for 90% of the FDI. Investments, eh?

 

Curiously, despite the wonderful headlines predicated on YoY, the FDI trend in million USD remains southbound. (Figure 3, middle visual)

 

And this bifurcation applies to raw materials imports, which expanded by 11.8%, despite the downtrend since 3Q 2022. Raw material imports serve as a pulse on the manufacturing sector. (Figure 3, lowest chart)

 

IV. A Revival of the Domestic Manufacturing Sector?

 

Yet, authorities tell us that growth in the manufacturing sector has been picking up.

Figure 4

 

First, the sector's bank credit growth more than doubled from 2% in January to 5.9% in February. The sector's bank credit growth has dovetailed the Producers Price Index (PPI) or "measure of change in the prices of products or commodities produced by domestic manufacturers and sold at farm gate prices to wholesale/other consumers in the domestic market." (PSA, Openstat)

 

Will the PPI follow the rebound in bank credit?

 

Second, manufacturing volume and value were up 8.9% and 7.5% in February 2024, even as net sales in volume and value contracted by 0.5% and 1.7%.

 

Generally, producers have been ramping up in production despite slower sales—implying substantial inventory accumulation.

 

V. Private Sector S&P PMI Survey Diverge from the PSA; Rising USD Peso Points to Risks of Stagflation

 

Figure 5

 

But, the S&P PMI survey for March diverged from the PSA:

 

The latest PMI® data by S&P Global indicated only a modest improvement in the health of the Filipino manufacturing sector during March. Though the pace of expansion was largely sustained from the previous survey period, growth in new orders remained historically subdued. Furthermore, production lapsed back into contraction for the first time since July 2022 amid material shortages. Companies raised their employment and buying activity at stronger rates and renewed their efforts to replenish inventories. That said, the degree of confidence in the outlook for output over the coming year dropped to a near four-year low. In terms of prices, the rate of input cost inflation softened to the weakest since October 2020. Additionally, charges levied for Filipino manufactured goods fell for the first time in nearly four years. (SPI Global, April 2024)

 

Both indicators shared the replenishment of inventories and the account of disinflation via the PPI, but instead of output growth, the SPI indicated a production lapse.

 

The Philippine PMI appears to have been plagued by a "rounding top." (Figure 5, topmost image)

 

In summary, government data points to an upturn in the manufacturing sector in the GDP, which diverges from the SPI’s outlook.

 

Dialing back to imports, only one major category registered increases in both YoY and MoM volume: fuel imports, which were up by 8.3% YoY and 28.4% MoM, driven by rising oil prices. (Figure 5, middle chart)

 

As noted above, due to the "low" base of 2023, government data recorded growth—a chimera.

 

However, the general trend for merchandise trade exhibits ongoing weakness in capital goods, consumers, and manufacturing, along with rising risks of stagflation.

 

The rising US dollar-Philippine peso $USDPHP suggests that the easing of this deficit (and the twin deficits) must be ephemeral. (Figure 5, lowest diagram)

 

___

References:

 

S&P Global Philippines Manufacturing PMI Filipino manufacturing output slides into contraction for the first time since July 2022, April 1, 2024, spglobal.com

 

 

 

Stagflation Ahoy! Philippine February CPI Rebounds as January Employment Rate Fell

 

Whether we like it or not, it is a fact that economics cannot remain an esoteric branch of knowledge accessible only to small groups of scholars and specialists. Economics deals with society's fundamental problems; it concerns everyone and belongs to all. It is the main and proper study of every citizen—Ludwig von Mises

 

In this issue

 

Stagflation Ahoy! Philippine February CPI Rebounds as January Employment Rate Fell

I. An Unexpected Rebound of the February CPI

II. Nine-Years of Supply-side "Transitory" Inflation? The Third Wave of the Inflation Cycle Lurks in the Shadows

III. January 2024 Employment Rate Fell After Hitting a Record Last December 2023

IV. January Labor Survey: Crucial Economic Perspectives and Hints of Stagflation

V. Proof of Financial Easing: Led by Consumers, January UC Bank Credit Surged

VI. Stagflation Ahoy! Bank’s Record Monetization of Public Debt Adrift Historic Highs

 

Stagflation Ahoy! February CPI Rebounds as January Employment Rate Fell

 

The rebound in February CPI reflects the loosening of financial conditions as the January employment rate surrenders part of the historic December gains—leading to the prospects of stagflation.

I. An Unexpected Rebound of the February CPI

 

Reuters, March 5, 2024: Philippine annual inflation sped up for the first time in five months in February because of faster increases in food and transport costs, likely giving the central bank little reason to consider lowering interest rates. The consumer price index (CPI) rose 3.4% in February from a year earlier, the statistics agency said on Tuesday, which was above the previous month's 2.8% and the market forecast of 3.1%, but still within the central bank's 2% to 4% target for the year.

 

In the establishment's statistical guessing game of "pin the tail on the donkey," the financial punditry generally missed their single number estimates of February 2024's CPI.

 

Compared to the BSP, the February CPI of 3.4% fell within their 80-bps range (2.6% to 3.6%) projection, which makes them look credible.

Figure 1

 

But as noted in my March 01st tweet, the markets appeared to have smelled the comeback of inflation. (Figure 1, upper picture)

 

Rising short-term yields have been narrowing the gap with the BSP's official rates, which means that Treasury traders have begun to realign their outlook. 

 

In a phrase, the Treasury markets have called the BSP's "hawkish" stance bluff.  The intent of BSP's hikes is for headline consumption.

 

Aside from Treasury activities, financial easing has been evident with the record high in public debt, an all-time high in the bank-dominated Total Financial Resources (TFR), historic consumer and public debt, and the surging PSEi 30.

 

Yet, the same establishment has not seen the emergence of the second wave of the incumbent inflation cycle.

 

II. Nine-Years of Supply-side "Transitory" Inflation? The Third Wave of the Inflation Cycle Lurks in the Shadows

 

The present inflation cycle has lasted nine years (thus far) and counting. (Figure 1, lower visuals)

 

Instead, they have instilled in the public that inflation has been supply-side driven, which implies “transitory,” while demand for the mainstream represents a “second-order” effect.  

 

The embedded stylized assumption is that price increases of primary commodities trigger price “inelasticities” in other areas, funded by “elastic” demand (total income, disposable income, and access to credit and savings)!   The law of abundance substitutes the law of scarcity!  Incredible.

 

That’s right, “transitory” equals nine years of inflation?

 

After all, unless markets are allowed to clear or function normally, interim price increases from supply imbalances will tend to be “transitory.”

 

That inflation comes in waves of a cycle points to STRUCTURAL demand or money/liquidity-driven inflation.

 

Thus, the narrative alluding to “supply-side” causes defies the law of demand and supply.

 

When inflation is seen as a general rise in prices, then anything that contributes to price increases is called inflationary. It is no longer the central bank and fractional-reserve banking that are the sources of inflation, but rather various other causes. In this framework, not only does the central bank have nothing to do with inflation, but on the contrary, the bank is regarded as an inflation fighter (Shostak, 2022) [bold added]

 

Essentially, denying the role of money and credit in the CPI protects the “integrity” of the BSP.

 

Nonetheless, a more realistic account of the demand-supply imbalances of the Philippine manufacturing conditions last February, as reported by the S&P PMI.

 

The imbalance between growing demand requirements and insufficient output to complete sales put a strain on inventories. Companies often utilized stocks to meet production requirements. February data highlighted fresh falls across both pre- and post-production inventories. Moreover, the latter was depleted at the strongest rate since January 2022. (S&P Global, 2024) [bold added]

 

The question is, what has been driving domestic demand”

 

Further, last February, Core inflation slipped from 3.8% to 3.6%, even as the headline CPI bounced from 2.8% to 3.4%.

 

Figure 2

 

While rising oil prices could increase pressure on the Transport CPI and spill over to the other economic "supply" aspects, this would depend on domestic demand.  (Figure 2, upper diagram)

 

Proof? Oil price volatility (US WTIC) hardly affected Japan's three decades of stagnation (largely disinflation). (Figure 2, lower chart)

 

While solid evidence that could validate a potential inflection point of the CPI has yet to emerge, the boost in February's food and transport CPI may be appetizers. 

 

But inflation's third wave of its long-term cycle, a simulacrum of the 1950s to the early 1980s, has been lurking in the corner.

 

III. January 2024 Employment Rate Fell After Hitting a Record Last December 2023

 

In other related news, authorities reported a surge in unemployment last January as labor participation plunged.

 

Inquirer.net, March 8, 2024: The country’s unemployment rate jumped to 4.5 percent in January from the record-low rate of 3.1 percent in December, with fewer job seekers also recorded in the first month of the year. A nationwide survey of 169,700 households showed there were 2.15 million unemployed Filipinos in January, higher than 1.60 million recorded in December, the Philippine Statistics Authority (PSA) reported Friday…The increase in unemployment rate coincided with the drop in the country’s labor force, which represents people aged 15 and above who are actively looking for jobs. In January, 48.09 million people were part of the labor force, down from 52.13 million in December. That was equivalent to a labor force participation rate of 61.1 percent in January, lower than 66.6 percent in the previous month.

 

The government produces statistics with bizarre and contradictory logic.

 

After a historic December, the January Philippine Statistics Authority (PSA) labor survey data reported a dramatic fall in employment and labor participation rates.

 

The employment rate, which hit an all-time high of 96.9% last December, slipped to a four-month low of 95.5% this January.

 

On the other hand, the labor participation rate plummeted from 66.6% in December to a five-month low of 61.1% last January.

 

On a YoY basis, here are several factors to consider:

 

-Population (15 years and older) grew by 2.01% or 1.55 million to 78.66 million

-But the labor force fell by 3.3% or 1.63 million to 48.09 million

-As a result, the unemployed population plunged by 9.4% or 222,000 to 2.15 million

-Or, the employed population slipped by 3% or 1.41 million to 45.943 million

-Hardly mentioned is that the "not in the labor force" sector jumped 11.6% or 3.18 million to 30.562 million

 

The formula:

 

Labor participation rate = labor force / total population

 

Unemployment or employment rate = unemployed (or employed) population /labor force.

 

Population = Labor force + not in the labor force

 

The Non-Labor Force as defined by the PSA: "Those not in the labor force are persons who are not looking for work because of reasons such as housekeeping, schooling, and permanent disability. Examples are housewives, students, persons with disability, or retired persons."

 

That is to say, the non-labor force is the euphemism of the "informal economy."

 

IV. January Labor Survey: Crucial Economic Perspectives and Hints of Stagflation

 

Some critical insights:

Figure 3

1. The government makes it appear that employers treat employment like the stock market, characterized by amplified volatility. 

 

Employers recruited and discharged employees as if they were automatons, not subject to domestic labor regulations.

 

The month-on-month change in January was the largest since 2021! (Figure 3, topmost window)

 

2. The plunge in the labor force translates to a substantial increase in the non-labor force. (Figure 3, middle image)

 

The PSA barely mentions that the non-labor force accounted for 38.9% of the population—the second-highest level since July 2023!  Amazing.

 

So, was the sudden surge in January 2024's non-labor population due to "housewives, students, persons with disability, or retired persons?"

 

Or was it that January 2024's data was an attempt to rectify the misstatement of December 2023's record employment rate?

 

Or, could employers be anticipating the ratification of high minimum wages?

 

Or could it be that these were symptoms of a deterioration of the formal economy, which caused a shift to the informal economy?

 

3. Authorities didn't say what caused the sharp decrease in the labor force. 

 

Still, the labor force remains the divisor of employment and unemployment rates, which likely means that in moving a chunk of the labor force to the non-labor force, the labor survey vastly understates the unemployment and exaggerates the employment rates.

 

4.  In January, though part-time jobs (as a share of the labor force) fell more, even full-time jobs slumped—which likely means that the January slump partly represented the "excess" temporary hiring last December. (Figure 3, lowest graph)

Figure 4

 

5. The jobs hit by the job retrenchments were the trade and agricultural sectors (YoY and MoM)!  (Figure 4, topmost pane)

 

Or, the most significant sectors of the labor force bore the brunt of the labor culling measures.

 

Importantly, could consumer retrenchment have spurred a massive exodus of wholesale and retail jobs?  What then happened to the consumer economy?  

 

Could this also signify the growing vacancies in retail commercial real estate?

 

And does the shortfall in agriculture workers translate to more "supply-side" problems for the industry?  Or does this represent a sudden growth in productivity?

 

6. The job survey anchors the GDP and the CPI, which extrapolates to further a substantial weakening last January.

 

The universal commercial bank's consumer credit card portfolio sustained a brisk growth rate last January despite the fall in the employed population. (Figure 4, middle chart)

 

If the labor survey data reflected accurate estimates, does this herald a spike in credit card NPLs?

 

Resembling part of the Phillips curve, in 2022, increases in employment dovetailed with the rise of the CPI.  However, the historic employment rates in Q4 2023 have emerged with falling CPI accompanied by a slowdown in household consumption—even as consumer credit has risen to all-time highs!  (Figure 4, lowest graph)

 

Or could the falling CPI mean the swelling of the unemployed with a time lag?  Or could this signify "stagflation"—a resurgent inflation amidst a higher unemployment rate?

In my humble opinion, stagflation is the likely outcome in the fullness of time.

 

Finally, when some polls say that firms are likely to hike wages—that would be a pipe dream.  It may be true for some job specializations.  But it is unlikely to occur in the face of the general labor force reeling under the weight of an enormous non-labor force population plus the unemployed.

V. Proof of Financial Easing: Led by Consumers, January UC Bank Credit Surged

 

The employment data and the CPI are closely related, which implies causation with monetary conditions.

 

As mentioned above, February's CPI bounce reflected financial easing.

 

Aside from the unparalleled surge in the Bank-led Total Financial Resources (TFR) and the organized pumps of the PSEi 30 (7.63% YTD and 16.2% from the October 2023 lows, as of March 8th), the BSP noted that Universal-Commercial bank credit rebounded last January.

Figure 5

Universal commercial bank production loans grew 5.9%, representing a 3-month high.  In the meantime, the growth rate of consumer loans reaccelerated to 25.2%—a 15-month high! (Figure 5, topmost image)

 

Though the UC bank credit card growth has mainly anchored this phenomenal growth rate, the expansion was broad-based.  (Figure 5, middle visuals)

 

Credit card loans zoomed by 30.1%, signifying six consecutive months of over 30% clip.  The salary loan growth rate also picked up tempo—up by 14.6%—a 6-month high!   The 19.7% growth rate in auto loans signified was the highest since June 2020!

 

In all, the metamorphosis of the UC bank business model towards consumer loans at the expense of production lending exhibits the entrenchment of structural inflation, which puts more money on consumption while diminishing exposure in production. The record contribution of consumers--excludes consumer real estate exposure.  (Figure 5, lowest graph)

 

In short, the bank's latest business model indicates "too much money chasing too few goods!"

 

Funny and ironically, the mainstream keeps touting a (supply side) problem brought about by the BSP's policies. 

 

VI. Stagflation Ahoy! Bank’s Record Monetization of Public Debt Adrift Historic Highs

 

But there's more.  

Figure 6

 

It's no coincidence that the rebound in February inflation has coincided with the historic growth in December's government's deficit spending, with a time lag.  (Figure 6, topmost image)

 

Not just record public debt, but the bank's NCoG (net claims on the central government)—though slightly down (-2.6%) MoM last January—continued to post a double-digit growth rate (15.9%).  In pesos, bank NGoC remains adrift at historic levels!  (Figure 6, middle pane)

 

So, banks continue to monetize the colossal buildup of public debt!

 

Essentially, consumer credit subsidies and bank (and non-bank financials) monetization represent a backdoor loosening of the nation's financial conditions, which permits the BSP to remain "hawkish."

 

In any case, consumer and government consumption deepens the nation's dependence on external trade and financing, which galvanizes the credit-financed misallocations from the "twin deficits."

 

By implementing aggressive experimental liquidity policies, the technocracy continues to gamble with the economy.

 

At the end of the day, extensive balance sheet leveraging by consumers has started to "spill over" as Non-Performing Loans (NPLs) in Q4 2023, even as the employment rate reached an all-time high last December! (Figure 6, lowest graph)

 

Should the government use its fiscal "stabilizing" tool to reflate the deflationary impulse from a resurgence of bank NPLs, expect the worsening of the balance sheet health of banks, the government, and the economy, "stagflation" would be its likely outcome.

 

____

References

 

Ludwig von Mises, 6. Economics and the Citizen, Human Action, 1998, p.875. Mises Institute

 

Frank Shostak, Inflation Is Not Price Increases. Inflation Causes Price Increases. Mises.org, November 11, 2022

 

S&P Global, Sustained growth across the Filipino manufacturing sector in February S&P Global Philippines Manufacturing PMI, March 1, 2024