Economists provide forecasts not because they know, but because they are asked to by clients or employers. The payoff structure is unusual. Forecasting’s key performance indicator is relative rather than absolute. This means an economist’s forecasts tend to cluster around a point with few if any outliers. As John Kenneth Galbraith held: “It is far, far safer to be wrong with the majority than to be right alone.”—Satyajit Das
In this issue:
Deciphering Conflicting Data: Record Philippine December Employment Rate, January 2024 CPI Plunge, and Q4 GDP’s Slowing Consumer Spending
I. A Goldilocks Economy? Record December Employment Rate and Plunge in January CPI; Not the Phillips Curve
II. Widening Divergence between the CPI, Treasury Market Rates and BSP Monetary Policy
III. Disinflation: Supply Side Glut?
IV. Disinflation: Slack in Demand Despite BSP’s Backdoor Easing?
V. Record Employment Rate? Why the Slowing per Capita Headline GDP and Household Consumption?
Deciphering Conflicting Data: Record Philippine December Employment Rate, January 2024 CPI Plunge, and Q4 GDP’s Slowing Consumer Spending
Is the mounting mismatch between record employment and sharp disinflation fueled by demand or supply? Q4 2023GDP provides a clue.
I. A Goldilocks Economy? Record December Employment Rate and Plunge in January CPI; Not the Phillips Curve
The Philippine Statistics Authority released two critically significant and interdependent economic data.
First, it reported a sharp decline in the statistical inflation rate, the CPI, last January.
Rappler, February 6: Prices of goods accelerated at a slower pace for the fourth straight month in January, as food prices continued to stabilize. But in a rice-loving country like the Philippines, this downtrend is not easily felt as global prices of the staple coupled with weather concerns have pushed up domestic prices. The Philippine Statistics Authority on Tuesday, February 6, reported that the inflation rate in January eased further to 2.8%, which is well within the government’s target range of 2% to 4%. The latest figure is lower than the 3.9% posted in December 2023, and the 8.7% recorded in January 2023.
Next, it published a record uptake in employment, or the nation registered its highest employment rate.
Inquirer.net, February 7: The proportion of unemployed Filipinos to total labor force sank to another record-low in the final month of 2023. There were 1.6 million jobless people in December 2023, down from 1.83 million in the preceding month, the Philippine Statistics Authority (PSA) reported Wednesday. This put the jobless rate rate to 3.1 percent, the lowest since the PSA adopted a new definition of “unemployment” back in 2005. It beat the previous record-low unemployment rate of 3.6 percent recorded in November.
Acolytes of the Phillips Curve, the mainstream, could see this as an anomaly.
Named after economist A.W. Phillips, the Phillips Curve represents the inverse relationship between inflation and unemployment, channeled through wages. "A falling unemployment rate signals an increase in the demand for labor, which puts upward pressure on wages. Profit-maximizing firms then raise the prices of their products in response to rising labor costs," or lower unemployment is associated with higher inflation and vice versa. (Engemann, 2020)
Although we are no fan of the Phillips Curve, the recent data paints the tape of a "Goldilocks economy" anchored on an explosion of productivity.
Really?
II. Widening Divergence between the CPI, Treasury Market Rates and BSP Monetary Policy
Figure 1
January's CPI has resulted in the widening deviance between the Treasury markets. (Figure 1, topmost chart)
The yields of one-month T-Bills have started to climb instead of falling. In the meantime, the BSP policy rate (ON-RRP rate) has also reached its broadest differentials with the CPI since 2019. A series of rate cuts by the BSP followed back then. (Figure 1, middle window)
The steep decline in the CPI has widened its gap with the BSP rates, resonating with the 2005-2007 episode. Will the BSP repeat its panic cuts in 2007? (Figure 1, lowest graph)
Figure 2
Further, the spread between core CPI and the headline CPI has expanded, revealing the "stickiness" of non-food and non-energy inflation. (Figure 1, topmost chart)
This mounting disjointedness could either mean that the BSP's "hawkishness" has influenced the Treasury markets, or the latter could be telegraphing a rebound in inflation.
The thing is, market price distortions could result in disorderly adjustments when the economy starts to reflect on the underlying conditions.
III. Disinflation: Supply Side Glut?
Has the current streak of disinflation emanated from the demand or supply side?
The mainstream has programmed the public to believe that the supply side is responsible for the latest episodes of inflation.
So, let us explore.
Manufacturing Q4 2023 "real" GDP reported a stagnant .6%, the lowest since Q1 2021. The sector's bank borrowings and the Producer Price Index, which recently drifted into deflationary territory, have indicated such doldrums. (Figure 2, middle diagram)
On the other hand, the real GDP imports of goods clocked in a -2.6% in Q4 2023.
Capital goods imports reported a -4.6%, +.15%, and 0% growth in the last three months of 2023. (Figure 2, lowest graph)
If investments were down, how could the employment rate reach a record high? From local savers?
Meanwhile, consumer goods imports grew by 4.8%, 15.4%, and 10.6%, respectively.
In a nutshell, consumers have become increasingly dependent on imports, which translates to rising trade deficits.
Figure 3
But the PSA also tells us that based on preliminary data, domestic trade plummeted in Q4 2023.
Philippine Statistics Authority, February 8: The total quantity of domestic trade in the fourth quarter of 2023 was registered at 3.24 million tons. This represents an annual decrease of 48.6 percent from the 6.31 million tons recorded quantity of domestic trade in the same quarter of 2022. In the third quarter of 2023, the annual decline was reported at 6.4 percent, while in the fourth quarter of 2022, an annual increase of 12.0 percent was recorded. Almost all (99.9%) of the commodities were traded through water (coastwise), while the rest were traded through air in the fourth quarter of 2023…Domestic trade value refers to the outflow value of commodities transported from the region/province of origin to another region/province of destination. The total value of domestic trade in the fourth quarter of 2023 amounted to PhP 137.71 billion. This indicates an annual decrease of 52.4 percent from the PhP 289.57 billion value of domestic trade in the same period of 2022. (bold and italics mine)
The PSA doesn't say what caused the sharp dive in domestic trade. If there had been bottlenecks in shipments and logistics, given a steady demand, prices of goods would have risen. Last December, the CPI was 3.9% and 4.3% in Q4, down from 4.1% in November and 5.3% in Q3.
Briefly, there is little evidence that a supply glut has led to the recent disinflation.
IV. Disinflation: Slack in Demand Despite BSP’s Backdoor Easing?
How about demand?
Unlike the BSP's rate hikes in 2018, which aggravated the slowdown in general bank lending, the Universal-Commercial Bank lending portfolio continues to grow but at a subdued pace. (Figure 3, middle graph)
And though lending to the production side has slowed somewhat, the record growth spike of consumer borrowings—in part from the BSP's interest rate caps and partly from responses to inflation—has partially offset this. (Figure 3, lowest chart)
Figure 4
Since the implementation of the subsidies, the domestic banking system's business model has shifted radically to focus on consumer spending. (Figure 4, topmost pane)
The CPI has closely tracked salary loans, which bounced off from its recent growth downturn. (Figure 4, middle chart)
And so, could the rebound in salary loans have emanated from more jobs? Salary loans in pesos are at a record high!
Add to this the record liquidity injections by banks via the monetization of the government's debt.
Net claims on central government (NCoCG) soared by 14.2% to a record Php 5.19 trillion last December. (Figure 4, lowest pane)
Also, the BSP's NCoCG spiked to Php 1.045 trillion.
Figure 5
As it happened, while the BSP insists on embracing a "hawkish" stance, the reality is that side policies (subsidies, relief measures, and injections) have led to a rebound in the money supply (M2 and M3) to the GDP ratio. (Figure 5, topmost diagram)
So, liquidity (credit) expands even as the BSP supposedly has been tightening.
Thus, the BSP's rate hikes signify a mirage—tightening for headline consumption only.
Should credit growth reaccelerate, despite the high rates, this could lead to a reversal in the present course of disinflation.
Have the Treasury markets been factoring stagflation—slowing growth amidst higher CPI?
Moreover, pulling forward consumption via increased leverage translates to lower growth and higher credit risks ahead.
V. Record Employment Rate? Why the Slowing per Capita Headline GDP and Household Consumption?
Here is the thing. The Q4 and 2023 GDP data has incorporated the all-time high in employment rate or the record-low unemployment rate.
But, in the face of alleged tightening labor, why have per capita GDP and household consumption been slowing? (Figure 5, middle and lowest graphs)
See earlier discussion of the Q4’s slowing consumer here.
Figure 6
Has this been because the principal industries (trade, finance, real estate, and transport) have seen a slowdown while the job increases have emerged from agriculture, construction, information, and public defense or mostly government and government-related activities?
Oddly, the government reported a rebound in manufacturing last December despite the sluggish GDP.
If demand has been strong, why the labor retrenchment in the trade industry?
Deteriorating quality of labor in the face of increasing quantity?
Or, could either one of the data (the CPI and the employment rate) have been inaccurate? Or could both have been defective? Or could the GDP have been wayward from actual conditions? Or, have I been missing anything?
In the end, a glut in the supply seems unlikely. Despite backdoor easing by the BSP, demand has been insufficient to boost the CPI and the GDP—even with record employment rates.
Further, demand from unproductive and speculative activities consumes savings and capital, which, therefore, is unsustainable.
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References
Kristie M. Engemann, What Is the Phillips Curve (and Why Has It Flattened)? January 14, 2020, Federal Reserve Bank of Saint Louis
