The Untold Stories of 3Q 6.9% GDP: Consumer Spending Growth PLUNGES to Post-Great Recession 2010 Levels! Goodbye Consumer Economy, Hello State Capitalism!

Today the majority of the citizens look upon government as an agency dispensing benefits. The wage earners and the farmers expect to receive from the treasury more than they contribute to its revenues. The state is in their eyes a spender, not a taker. These popular tenets were rationalized and elevated to the rank of a quasi-economic doctrine by Lord Keynes and his disciples. Spending and unbalanced budgets are merely synonyms for capital consumption. If current expenditure, however beneficial it may be considered, is financed by taxing away those parts of higher incomes which would have been employed for investment, by inheritance taxes, or by borrowing, the government becomes a factor making for capital consumption.—Ludwig von Mises

In this issue

The Untold Stories of 3Q 6.9% GDP: Consumer Spending Growth PLUNGES to Post-Great Recession 2010 Levels! Goodbye Consumer Economy, Hello State Capitalism!

-Goodbye Consumer Economy!

-Clashing Statistics: Which is True?

-Hello State Capitalism! Public Sector Construction Crowding out the Private Sector

-3Q GDP: Fitting a Square Peg in a Round Hole; The Bombshell Chart from 3Q GDP

The Untold Stories of 3Q 6.9% GDP: Consumer Spending Growth PLUNGES to Post-Great Recession 2010 Levels! Goodbye Consumer Economy, Hello State Capitalism!

Statistics is not economics.

From Bloomberg:

The Philippine economy grew 6.9 percent last quarter, exceeding all estimates in a Bloomberg survey and cementing its position as one of the fastest-expanding in the world.

The Philippines is emerging as one of this decade’s economic stars with the World Bank predicting growth of more than 6 percent until 2019, underpinned by an ambitious infrastructure building program and a young and growing population. Finance Secretary Carlos Dominguez on Thursday said he expects faster growth in the succeeding quarters, while the central bank Governor Nestor Espenilla said there are no signs of overheating in the economy…

Consumer spending, which makes up about 70 percent of GDP, gained 4.5 percent from a year earlier. That is the slowest pace since 2010, according to data compiled by Bloomberg.

The public is mesmerized by articles like this, reinforcing the biases promulgated by the mainstream

But the devil is in the details.

Whether by design or by coincidence, two crucial themes emerge from the 3Q

First, the Philippine economy has been undergoing a dramatic transformation process away from the consumers.

Entwined with the first; second, to fit a square peg in a round hole represents the logic behind such supposed paradigm shift

Goodbye Consumer Economy!

As popular wisdom holds, consumers have a stranglehold on the Philippine economy.

Well this dynamic, if the present trends extend to the future won’t hold true.

The Philippine Statistics Authority’s 3Q GDP and from the Quarterly National Accounts are the sources of data used for the following charts and analysis

 

I present two perspectives from the Household Final Consumption Expenditure (HFCE) in the charts above.

The first is the growth rate level. The second is the comparative figures between present growth rate (3Q) and the previous quarter (2Q) as well as the rates from a year ago (3Q 2016).

3Q real or inflation-adjusted GDP was at 4.5% (nominal HFCE 7.5%, HFCE published inflation rates 2.9%)

At 4.5%, real 3Q consumer spending growth has dropped to 2010 post-Great Recession lows!

Real 3Q consumer spending growth collapsed by 270 basis points in 4 quarters or from 3Q 2016’s rate of 7.2%, representing one of the swiftestdeclines since 1999. The other accounts of these were in the Great Recession in 2008-2009 and 2004-2005 (see green rectangles above window)

In relative time frames based on percentages, real 3Q consumer spending of 4.5% plummeted 23.73% from 2Q’s 5.9% and 37.13% from 3Q 2016’s 7.2%. (lower window) These rates have been the biggest since 2Q of 2010!

Numbers don’t do justice by themselves. The operating conditions, especially in the longer frames, were different.  For instance, in the new millennium, the shopping mall-real estate bubbles were in their infancy. Debt levels were minimal. Production structures were different.

In the previous episodes, consumer inflation rates have soared past HFCE growth rates thus incited the spending meltdown (2004-2005, 2008-2009)

Today, inflation rates have remained distant from real consumer growth rates, yet the same degree of consumer retrenchment has resurfaced.

Inflation’s baseline effects may have played a role.

A fifty cents increase on a Php 10 priced unit would account for 5% inflation, whereas the same amount of increase applied to a Php 20 priced unit would account for only 2.5%. Though 2.5% is smaller than 5%, the individual’s purchasing power is affected by increases in nominal prices, regardless of the diminished rate of statistical inflation in %. Without corresponding increases in income, the higher the prices, the lesser the consumer’s purchasing power – all things being equal.

Importantly, the share of consumer spending in GDP has incrementally been headed south. (upper window)

The pivot point of the consumer’s role as a key driver of the economy occurred in 2005. The surge in the consumer spending inflation rate in 2004-2005 and 2008-2009 pulled down the consumer’s role in the GDP. After the Great Recession, the share of consumers to GDP rebounded. But it failed to reach the heights of 2005.

However, from 2011 until the present, the significance of the consumers has materially diminished. The growth collapse of consumer spending in the three quarters of 2017 has only magnified this trend.

The first untold story of 3Q GDP is the declining trend of consumer spending.

Goodbye Consumers!

Clashing Statistics: Which is True?

If consumers were in absentia then who took up their role?

The curt answer to this is the government.

From the expenditure perspective, only the government’s expenditure (Government Final Consumption Expenditure) registered a quarter-on-quarter increase (8.3% in 3Q, 7.1% in 2Q, .1% in 1Q). So government spending played a critical role in juicing up the government statistics for two quarters. (middle window)

Because of lower construction growth (7.1% in 3Q compared to 9.4% in 2Q), capital formation growth decelerated to 6.6% from 8.5% in the 2Q.

Exports and imports were up by double digits 17.2% and 13.9% but were lower compared the 2Q’s 20.4% and 18.7%.

Here is the thing. The PSA, the agency responsible for the national account and other government statistics tells of TWO different stories for 3Q exports and imports or merchandise trade.

In the 3Q GDP, Nominal exports and imports were also up by double digits 18.8% and 12.4%. But on a separate statistics “Highlights of the Philippine Export and Import Statistics: September 2017”, the reported nominal and export and import growth had only been at 2.98% and 8.19%. These account for about 1,000 bps in differentials and would signify a far cry from the published NGDP numbers!

Amazing.

And such statistical anomaly applies not only to exports and imports but to the manufacturing sector as well!

From the industry side of the GDP, it was the service sector (+7.1% compared to 6.3% in 2Q) that pushed the 3Q GDP higher. The industry sector was marginally up (+7.5% in 3Q from 7.4% in 2Q) while Agriculture growth skidded to 2.5% from 6.3% in the 2Q.

Although the utility sector was higher (+3.3% in 3Q and +2.9% 2Q), it was the manufacturing sector (+9.4% in 3Q and +7.9% in 2Q) which was responsible for the bulk of the industry’s performance. Mining and quarrying fell (4.6% in 3Q and 12.5% in 2Q).

From the PSA’s “Monthly Integrated Survey of Selected Industries: September 2017” industrial production registered a NEGATIVE or a contraction in September (-4.3%), and also in July (-4.4%). August’s Industrial production was 1.2%. From the start of the year, industrial production has headed south. This runs OPPOSITE to the manufacturing GDP numbers. Even private sector’s estimates (NIKKEI PMI) of manufacturing performance have been sharply down in the 3Q.

Revenues and earnings performance of listed manufacturing issues has been unsupportive of this claim.

So the PSA tell us of different stories predicated on numbers which have gone in opposite directions.

A Janus Faced 3Q Statistics.

Hello State Capitalism! Public Sector Construction Crowding out the Private Sector

As I have noted above, GFCE spending has risen robustly in 2 successive quarters. In the 3Q, government spending was the SOLE source of strength (quarter-on-quarter) in the expenditure side.

Embedded in the manufacturing chart is the contribution of construction to the GDP.

3Q construction growth virtually crashed! From the expenditure side (real prices), construction grew at 2.8% rate in 3Q, less than half of the 7.6% rate in 2Q. From the industry side (real prices), the sector advanced at 3.8% in 3Q, which was a little more than half of the 7.1% rate in 2Q.

The stagnant cumulative construction numbers had mainly been because of the private sector, which registered a flat-lined +.57% growth in 3Q. About 80% of the construction GDP hails from the private sector.

Nevertheless, the build, build and build spree pushed the public sector’s construction growth to 12.56%, a second consecutive quarter of 12% growth. Over the past 5 years, construction activities by the private and public sectors have operated mostly in contrasting growth trends. Peaks and declines of the private construction have typically run in the opposite direction of the public sector. (upper window)

The crowding out effect explains a substantial part of this dynamic. The public sector’s activities come at the expense of the private sector. Hence, the larger the public sector projects, the likelihood that the activities of the private counterparts will get squeezed.

Real economy prices are affected by competition for resources Thus, another transmission channel for the crowding out effect is through prices. Motivated by profit and losses, the private sector is highly sensitive to price changes which impact business costs. Hence, price instability is likely to reduce the private sector’s incentives to undertake construction projects.

Popular wisdom holds that build, build, and build will function like an economic elixir, sorry to say, it won’t. It will benefit only special groups and the government.

Government expenditures can be seen from the services sector.

The biggest gainer this quarter was the Other Services (+7.7% in 3Q, +4.9% in 2Q) led by the education sector (+13.21% in 3Q, +7.4% in 2Q). Education accounted for 44% of the Other sector’s gross value added (GVA). [middle and lowest pane]

Perhaps a large part of such expenditures has been due to the public sector. Free college tuition became a mandate last quarter.  A sharp increase in demand from such welfare program should translate to enormous expansionary spending by the government. Though the law should take effect next year, part of the current expenditures may be in preparation for this.

Expenditures in public administration, defense, and compulsory social security also jumped to 8.2% from 7.6% in the 2Q.

So 3Q GDP was principally a product of government expenditures.

Importantly, if the current political-economic dynamic persists, the government and consumers will be trading places.

Hello State Capitalism!

3Q GDP: Fitting a Square Peg in a Round Hole; The Bombshell Chart from 3Q GDP

3Q GDP statistics had also been about fitting a square peg in a round hole

Curiously, hotel expenditures grew at a bristling rate of 9.2% in the 3Q but marginally slower than 10% in the 2Q. The Hotel sector represents 19% share of the Other services Gross Value Added (GVA). With a sharp downturn in domestic consumer spending, will there be enough foreign visitors to fill-in such massive capacity expansions??? About half of tourism spending emanates from domestic tourists

The other segments of the service sector which supposedly elevated the 3Q GDP were Trade and repair (+6.8%, +5.7%) and logistics [transportation storage and communications] (+3.9%, +3.4%) [see middle window]

On the other hand, real estate (+7.7% in 3Q, +8.3% 2Q) and financial intermediation (+8.6%, +9.1%) posted slight declines in growth rates.

Think of it, a big chunk of service GDP expenditures (hotel, trade, real estate, financial intermediation and education) have been directed at the consumers, yet the government implicitly or unwittingly tell us that the role of household consumers have gone, and or, will go down.

While a shift to state capitalism may provide interim/ephemeral benefits, especially to politically connected firms, what will be the price to pay for this? What would happen to the entire supply chain of consumer infrastructure?

 

In closing, the above chart is a striking showcase of the mounting imbalances that can be seen even from the data of the Philippine Statistics Authority.

It is emblematic of the monetary malaise called overcapacity which is a symptom of capital consumption. It is why shopping malls have shown signs of increased vacancy, despite raging growth in money supply. It is also why Familymart was sold in haste by the Ayala-SSI consortium

While the mainstream exchanged high fives from the release of 3Q GDP, unknown to most, 3Q GDP represents a landmine as the underlying structure of the economy – the consumers – have been under siege.

And this shift to state capitalism will only accelerate such decadent process.