A principle, then, is the essence of reality. To try to create our own reality is both futile and destructive. You certainly have the right to go on believing whatever you want to believe, but reality doesn’t care about your wants or beliefs—Robert Ringer
In this issue
3Q GDP 6.2% Boosted By Statistical Alchemy from Suppressed CPI, Is the Manufacturing Sector Headed for a Recession?
-6.2% 3Q GDP: A Product of Low CPI Flimflam
-3Q Expenditure GDP: Government Expenditure Recovers as Diminishing Returns Plague Credit Finance Household Spending!
-3Q’s Build, Build, Build Rejuvenated!
-As Property GDP Exhibits Modest Increase: Debt Financed Speculative Blowoff on Residential Real Estate!
-Is the Manufacturing Sector Headed for a Recession That May Have a Ripple Effect?
3Q GDP 6.2% Boosted By Statistical Alchemy from Suppressed CPI, Is the Manufacturing Sector Headed for a Recession?
6.2% 3Q GDP: A Product of Low CPI Flimflam
Earlier I wrote*,
Because the CPI is a politically sensitive statistic, promoting the National Government’s agenda maybe an unstated objective behind its construction.
Such an agenda includes embellishing the National Accounts or GDP statistics intended to promote the political capital of the incumbent administration engineered to influence the market prices for the NG to obtain cheap financing from the public for its boondoggles.
3Q CPI Fall to 42-Month Low as Divergences in Component CPIs Widen; Flawed CPI—the Shakey’s Pizza Evidence November 10, 2019
I showed an example of the effects from adjustments of the PCE deflator to transform magically 3Q’s agriculture’s negative into a positive GDP.
The effects of the distortions of the CPI on the national accounts 3Q data had been widespread, which can be seen even from the purview of the headline index.
Since “CPI components are used as deflators for most personal consumption expenditures (PCE) in the calculation of the gross national product”, according to the Philippine Statistics Authority, magnifying the headline GDP in the 3Q was the plunge in the CPI.
First, 2Q and 3Q shared the same nominal GDP of 6.6%. (figure 1, PSA table)
Next, the National Government’s consumer inflation index, the CPI, plunged from 3.0% to 1.7% in the same period.
The assumption embedded in the statistical models of the PSA is that when the CPI Index is zero-bound, this must translate to additional purchasing power to expenditures.
The chart of the deflator’s implicit index exhibits such a relationship.
Figure 1
Echoing 2015, real GDP either closed its gap with the nominal or current based GDP or even surpassed the latter when the growth YoY of the implicit index fell below 1%. (figure 1, upper window)
The 3Q 2019’s implicit index grew .38% down sharply from 1.04% in 2Q.
So when consumers reduced their spending based on the current peso, statisticians said that this was good, and we should be happy because lower inflation amplified our purchasing power!
And examples can be seen from the 3Q data: Current Priced Household Consumption GDP dropped to 7.3% in Q3 from 8.3% in Q2, but when adjusted for inflation these GDP numbers U-turned to 5.9% from 5.5%! See G-R-O-W-T-H!
And because household spending represents the largest pie accounting for 66.2% of the real GDP basket, zero bound inflation sent the headline GDP soaring to 6.2%!
Statisticians didn’t tell us that the reason for the zero-bound CPI. They didn’t say that this was principally due to the transitory effects from the National Government’s intervention to resolve the 2018's rice crisis.
Bluntly put, outside rice prices, the implicit index would not have collapsed by that degree! And to that end, the 3Q GDP would have remained at 1H levels!
3Q Expenditure GDP: Government Expenditure Recovers as Diminishing Returns Plague Credit Finance Household Spending!
But hey, what would have happened without this CPI crash?
Partly induced by the plunge in CPI, the treasury boom bolstered the banking system’s blistering profit growth. Had this boom had been limited, what would have happened to the banking system’s subsidized profits?
And on the same plane, wouldn’t this reduce the interest rate subsidy to the NG that would not only translate to higher debt servicing but also inhibit their campaign for a blitzkrieg in deficit spending?
Back to the GDP.
And on the expenditure side, while consumers were supposedly in a spending binge, stagnation encumbered the current based merchandise trade (exports and imports) data.
And outside construction, capital formation, like merchandise trade, had been in doldrums too. (figure 1 PSA table)
That leaves the September’s record fiscal deficit* as having an immense sway on government expenditures GDP, which ballooned in current and real terms in 3Q, the second-most important factor in the 3Q GDP.
*Public Spending U-Turn: Record September Spending and Deficit, PhilHealth, Irrigation and Land Bank Subsidies Surge! October 28, 2019
So, 3Q expenditure GDP tells us that the expenditures of households and the National Government were solely responsible for the 6.2% growth.
But here’s the thing. If stupor has afflicted the general economy, then what or how has the recovery in household spending been financed?
Figure 2
The answer: consumers have been guzzling leverage at rates never seen before. And despite this massive accumulation of consumer debt, household (current priced) GDP continues to cascade.
In the 3Q, the household debt to NGDP rocketed to a record rate of 23.7%. And the bulk of such intensified borrowing occurred in 2019!
Yet, since the population that has access to formal credit, mostly through banks, has been limited, the implication is that this record borrowing spree translates to an intensified buildup in leverage for those who borrow through the formal financial system.
Also, household credit here consists only of credit cards, car loans, payroll loans, and others. The data doesn’t include household leverage on real estate.
Last but not least, falling NGDP amidst record credit usage tell us of the diminishing returns of credit on household expenditures.
On the other hand, it explains much about the escalating risks being imbued by the financial system, which the public has been kept blissfully blind.
3Q’s Build, Build, Build Rejuvenated!
The obverse side of expenditures is the GDP by industry origin GDP.
Figure 3
It shares the same story as expenditures.
As earlier stated, the agricultural sector magically boosted by the PCE deflator. This statistical magic extends to the manufacturing GDP, where a negative morphed into positive GDP.
In terms of contribution, higher growth in both nominal and real terms in the industry sector was solely from the construction.
And the slowdown on the trade GDP, despite the outperformance of its subcomponents, the transports, and real estate sectors pulled lower the service sector.
Meanwhile, public construction real GDP rebounded to 11% in Q3 from two straight quarters of contraction as the private construction GDP boom of 19% moderated from Q2’s sizzling 23.4%. Private construction GDP possibly includes PPPs.
As Property GDP Exhibits Modest Increase: Debt Financed Speculative Blowoff on Residential Real Estate!
Figure 4
Another notable factor, while real estate GDP registered a modest growth of 6.9% (real) in the 3Q, backed by its subcomponents real estate (6.9%), rental (3%) and ownership in dwellings (3.5%), its GDP seems hardly congruent with PSE disclosures of property firms and recorded property prices.
Simmering growth in real estate revenues has offset a sharp decline in rental revenues of a market leader in the property industry. Other property firms also registered substantial increases in real estate sales.
Residential real estate prices have been in a speculative blowoff phase since Q4 2018, which has been backed by a revitalized bank lending to the industry. This lending doesn’t include bank consumer real estate loans.
In Q2 2019, residential prices in Makati posted a fiery 20.2% growth. In contrast, growth in Makati’s commercial prices tumbled to 3.32%, its lowest since 2011, according to Bank for International Settlement data. (figure 4, lower pane)
Operating in an environment of tightening of liquidity, which has brought upon a slowdown in the general economy, real estate sales have suddenly been turbocharged, which implies a narrowing latitude of rising assets prompting for more people to intensify price chasing dynamics.
Furthermore, the asymmetry in the price actions between commercial and residential properties suggest a forthcoming convergence; either commercial prices rise to absorb expanded residential demand, or the latter's demand will fall.
Is the Manufacturing Sector Headed for a Recession That May Have a Ripple Effect?
Figure 5
One of the major sectors that have remained in an arduous struggle has been the manufacturing GDP.
Though buoyed by the PCE deflator, real manufacturing GDP clocked 2.4% in the 3Q, the lowest since 2010. In nominal terms, the manufacturing GDP slumped by 1.5%, its largest since 2008. The last time Manufacturing experienced a GDP shrinkage was in Q3 2014, where it posted a 1% decline. (figure 5 upper pane)
Manufacturing GDP has been in a downturn since its latest peak in Q3 2016. Since climaxing in October 2018, bank lending to the sector has also turned negative in August and September 2019, corroborating the deficit of its nominal 3Q GDP. (figure 5 middle pane)
And the GDP downtrend of this sector has only accelerated in 2019!
Should the current downturn persist, will it bring upon a recession to the manufacturing sector? And if it does, would this spread to the rest?
In the 3Q, manufacturing has a 16% share of the NGDP, the second-largest sector after the trade sector, and a 21.22% share, the most, in the real GDP.
Finally, despite the 6.2% GDP, the long-term downtrend in the per capita GDP and Household Consumption remain intact.
It appears that goosing up the GDP wasn’t enough to reverse the tide.
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