Monday, June 13, 2016

Government Say Industrial Production Grew by 6.8% in April, BSP Banking Credit Data Says No

The Philippine government via the Philippine Statistics Authority announced that Industrial Production grew by 6.8% last April. Nice. Only if it were true. 

The reason that it is really hard to believe such statistically aggregated numbers, which are derived from mostly surveys, are twofold. 

One, government’s own data have been in glaring conflict with each other. As example, reported activities in industrial production have made big deviances with reported national accounts data in the context of NGDP. The wild divergent gyrations of what should be similar data are proof to such inconsistencies. 

Two, real data don’t seem to confirm survey data. 

By real data, I mean in terms of comparable BSP’s banking loans to the manufacturing sector. 

Banking loans are actual data made by banks based on declared usage on a specific sector. While declaration and actual use of borrowed money may differ, the aggregate credit money issued has been more or less accurately represented.



To account for the credit intensity (credit growth over NGDP), in the last nine quarters the Philippine economy (via NGDP) borrowed Php 2 to 3 for every Php growth or output

As caveat to such statistics, since bank borrowing represents a small segment of the population while NGDP is supposed measure all the economic activities, such data tends to dilute the overall exposure of the system’s leverage. Additionally, sectoral borrowings are different. Moreover, GDP could have been inflated thereby likewise diminishing the state of actual leverage in the system.

Based on the PSA’s 1Q NGDP, from the industry perspective, at 20.33% manufacturing accounted for the largest share of estimated peso output in 1Q 2016.

Based on the BSP’s April bank credit data, the share of manufacturing loans to the overall loans to productive activities totaled 16%—the second largest after real estate at 19.63%

As a side note, remember this? Why Blowoff Episodes Reveals That The Boom Is The Disease! June 5, 2016

Since GDP is about money based spending and since bank credit growth accounted for more than 70% of money supply growth, then this means that the core segment of GDP has accrued from bank credit growth. In short, bank credit growth is the quintessence of GDP performance.  

The chart above of the NGDP (blue) and Bank Credit Growth (red) provides the empirical evidence of such relationships



Nevertheless, when major industries have been borrowing Php 2-3 peso for every peso output, for manufacturing the relationship between lending conditions and output seems out of whack.

Alternatively, such only shows of how the manufacturing sector has helped reduced the headline “leverage” in the system

The value of industrial production has been negative from June to December 2015. The big rally came in 2016 (as BSP stimulated), particularly January’s 27.2%, February and April’s 6.8% while March underperformed at 1.8%.

But bank loan growth to the sector over the same period was only 5.49% in January, 5.73% February, 1.84% in March and 2.91% in April.

Because headline value output has been larger than credit growth, then this means that the industry has been self-financing since the start of the year!

How wonderful!

So government statistics could have been exaggerating on the output. Or that the BSP have been underreporting actual loans. Or loans to the other industry have been redirected to the manufacturing sector.

Perhaps too, the manufacturing sector has been so awash with cash to have provided self-financing for their working capital or for capex. Ironically, the sector suffered 11 months of reported contractions in the sector in 2015! So government statistics seem to suggest that output losses would bring about a lot of cash!!!

How splendid!

Maybe suppliers of the industry have not only provided credit for products sold to the sector, but they could have lent money to their clients. Perhaps buyers of the manufacturing sector made advanced payments on their purchases. Or buyers could have lent money to their manufacturing suppliers outside of the regular transactions.

Or manufacturers tapped the bond markets (which is very unlikely given the juvenile state of capital markets). Or it could be that manufacturers tapped the informal sector, such as those providing 5-6 loans in motorcycles!

Such is the kind of headline “economics” that has been predominant in the mainstream.

The vulgar use of statistics have been projected as to resemble the actual state of the “economic” affairs even when such operate on an egregious self-contradictory logical relationship with its purported subject.

And because everyone seems to believe, without question, what the government says, such statistics are deemed as a reflection of reality. 

In essence, bubbles are the belief in accomplishing something from nothing. And headline “economics” like this, which tries to show something from nothing, reinforces the current state of the evolving bubble (boom-bust) cycles.




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