One crucial skill that I have learned from economics is to be able to distinguish the proverbial wheat from the chaff or to distil noise from signals
Yet chaffs and noises dominate the overall conversations almost everywhere. This has been most conspicuous in the realm of politics—where abstracts and emotions govern topical issues. And since politics is entwined with the law of scarcity, abstracts and emotions likewise supersedes or buries the latter’s significance.
And one way to condition the public of the supposed wonders attained by the present past and present political leadership would be in the economic dimension. This has typically been channeled through the brandishing of marvelously looking (statistical) chaff/noise from which subsequently would be extrapolated by the consensus as politically inspired G-R-O-W-T-H.
Even the BSP Chief Affirmed that Statistics Is NOT Economics
In a speech last year, the BSP chief, Mr. Amando Tetangco Jr. lectured journalists on how to conduct proper reporting. [Phisix 7,800: Record Phisix as the BSP Continues with Deflation Spiel! March 9, 2015; see Before It’s News copy]
Economic numbers rarely tell the complete story when taken at face value. Therefore, a responsible journalist who seeks to offer readers a fuller appreciation of the information will examine the figures within a broader context or against an array of other relevant indicators.
Given the facts on hand, a good reporter will know which leads to chase, and which to set aside, perhaps for another day, for another story. The objective is to understand what is happening -- and why -- so that the facts can be pieced together into a sensible and useful news report for their publics.
Again, that was a gem of wisdom. Unfortunately, the BSP honcho wanted media to focus on reporting “deflation”, hence the implicit harangue.
And sadly too, practicing what they preach has hardly been a virtue by political authorities. In reality, officials have been key sources obfuscation
BSP’s Cherry Picking of Portfolio Numbers
Just to show a recent example of attempts to cheerlead statistics via portfolio flows.
Because of the recent meltup in the Phisix, portfolio flows had generally been positive. But when the selling pressure reemerged in September, the BSP seem to have engaged in the “framing” or mental conditioning of the public. This they did by projecting “still” net positive flows by shifting point of references in their report. So instead of reporting the traditional monthly data, they highlight on the quarterly performance. The headlines usually carry on such themes.
Here headlines for the September data. “Foreign portfolio investments yield net inflows for the third quarter of 2016” October 13, 2016
Most people don’t exert an effort to look at details, hence, the headlines frequently deliver the punch/ message.
Although in the second paragraph of the said disclosure, the BSP reported, “outflows for September rose by 56.5 percent from US$1.3 billion the previous month due to profit taking. Year-on-year, outflows grew by 23.0 percent from US$1.7 billion.”
Notice of the difference in the headlines between September vis-à-vis the previous reports.
Foreign Portfolio Investments Yield Net Inflows in August 2016 September 15, 2016
Foreign Portfolio Investments Post Net Inflows in June 2016 July 14, 2016
Foreign Portfolio Investments Post Net Inflows in May 2016 June 16, 2016
Foreign Portfolio Investments Post Net Outflows in April 2016 May 13, 2016
As one would notice, the first and second quarter performances hardly made the headlines. That’s because monthly changes were mostly positive. It was only in April where they admitted to net outflows. And that’s because the Phisix was just getting a lift from the selloff.
The moral here is that heavy dependence on the headlines will give misimpressions of actual developments. This is especially important when political agencies try to “sell the economy” via selectively choosing reference points (or padding up numbers) to punctuate their case. I’d call this "shouting statistics". But that’s how politics work. And conversely, that’s exactly irrelevant to economics.
This post aims to show of the critical contradictions of the government’s August manufacturing data from economic logic.
To take Mr. Tetangco’s invaluable council, economic numbers shouldn’t be taken at face value alone, but instead, they should be “examined within a broader context or against an array of other relevant indicators”.
Again, specific economic numbers has to confirm with overall economic logic.
Manufacturing Magic: G-R-O-W-T-H versus Prices
The Philippine Statistics Authority reported a “wow” number for the manufacturing performance last August.
Manufacturing growth was said to have leaped 8.4% in value and 13.5% in volume yoy. Since this is a survey constructed statistics then there would be little basis to appraise of the validity of its survey methods.
Again, compared to “an array of other relevant indicators” these numbers doesn’t seem to fit economic reasoning. Reason? Growth numbers don’t align with other factors, particularly prices, credit conditions and demand.
One, the government’s producer’s price index continues to be in an amazingly deflationary (contractionary) mode.
Yet if there has been so much demand for manufacturing, then why would input prices continue to shrink steeply? The only plausible explanation would be for too much excess inventory from either previous production and from an avalanche of imports (for the longest time).
Other than this, hardly can a connection between prices and output be established. Yes some economics eh?
a. measures monthly or yearly changes in the producer's price of key commodities in the manufacturing sector,
b. serves as a deflator to Value of Production Index (VaPI) in the estimation of the Volume of Production Index (VoPI), and
c. serves as deflator in the estimation of manufacturing production in real terms (at constant prices) in the system of national accounts.
So has PPI’s consistent price deflation amplified statistical growth conditions rather than actual output growth?
If you torture statistics enough they will confess to anything!
One would even note that if manufacturing output eventually ends up with the consumer, PPI prices should be rising.
Reason? Because consumer prices continue to spiral higher. For instance, government’s consumer prices through higher CPI was at August 1.8% while Retail index was at 2.3% also in August. Even wholesale prices(July .2%) appear to have been buoyed—by bank credit expansion.
Yet the pull from consumption has not affected manufacturing input prices. Just how can this be?
Manufacturing Magic: Has the Manufacturing Industry Operated in All Cash System?
Two, follow the money trail.
If one looks at the BSP’s banking loan growth applied to the government’s GDP and to the manufacturing sector, one would see another critical inconsistency.
For starters, here are some basic numbers.
The manufacturing sector accounted for the second largest bank borrower after real estate with 15.6% share of total loans to the production loans as of August. Moreover, based on the government’s GDP data, manufacturing accounted for the largest share of the 1H PSA’s industrial based NGDP pie at 18.75%.
So contrary to popular wisdom, domestic manufacturing plays a critical role in the economy.
Yet since 2015, growth in the banking system’s loan to productive sector accounted for Php 2.0-2.5 for every Php 1 NGDP. This means that on the average, industries have been borrowing much more than they have been producing.
But this comes with the paradoxical exception of manufacturing. (If true then this means other sectors have been borrowing more intensely than the average)
Manufacturing loans from the banking system as of August grew by only 7.7%. This has stunningly been SMALLER than the NGDP at 8.4%. This demonstrates that the manufacturing sector has either been so liquid or that they have resorted to non-bank financing.
Being so liquid means that the manufacturing sector produces so much cash (extremely profitable) for them not to rely on credit whether for internal operations, supply and demand requirements or for expansion.
Such numbers also say that manufacturing sector has so much money they could be implicit net lenders!
Manufacturing output had been mostly down in 2015. Credit during the same period also stagnated. Today, it’s a totally different story. Manufacturing output outperforms even while credit conditions lag.
Two numbers coming from what seem as different worlds?
On the other hand, manufacturing could be sourcing their financing requirements through vendor finance or to supply finance or through intercorporate loans or borrowing from capital markets and or from external borrowing. While many of these may signify as actual activities or developments, the scale may not be sufficient to apply to the aggregate or the industry
Manufacturing Magic: With Exports in Recession, Who’s Buying?
Third, who’s buying?
This tells us that demand has been sourced through DOMESTIC requirements only. Yet producer’s prices fail to surge higher.
Moreover, given that imports continue to soar, then this only means that domestic demand has been so strong.
It’s so strong such that government revenues have been faltering and PSE eps/ngdp with the exception of 2Q 2016 has been mostly stagnating.
As a side note, I wonder why the government has not yet come up with their August fiscal balance.
So much stuff are being produced (manufacturing) and bought overseas (imports) financed by credit. Yet prices at the consumer levels continue to rise while prices at the production level continue to fall.
Additionally, the huge boost to the supply side (goods) could also translate to excess inventories.
Again, it’s like reporting two different economic environments.
And this ironically represents mainstream “economics”.
My guess is that based on credit conditions the industry’s growth rates may be at 3-3.85% rather than 7.7%. Still positive, but not as puffed up as the government wants to project.
Soaring Payroll Loans: Even the Low Income Segment Have Now Been Gearing UP
Here’s a final note: a burgeoning source of consumer demand side growth
Since only a few, or about 4 or less people (out of 10) are banked, and where a most likely a significant share of the 4 banked people have been due to payroll accounts, the recent surge in payroll loans could have significant implications.
Payroll loans are likely loans acquired by the lower spectrum group of the (formally) employed sector.
“Unsecured loans for a broad range of consumption purposes, granted to individuals mainly on the basis of regular salary, pension or other fixed compensation, where repayment would come from such future cash flows, either through salary deductions, debits from the borrower’s deposit account, mobile payments, pay-through collections, over-the-counter payments or other type of payment arrangement agreed upon by the borrower and lender.”
The definition now includes credit accommodations for education, hospitalization, emergency, travel, household and other personal consumption needs, but excludes credit cards, motor vehicles and other personal loans, which are covered under other existing BSP regulations.
The streaking surge in payroll loans suggests that the number of employed people that have been taking out loans has grown substantially (quantity) or that the scale of loans acquired by employed people has been accelerating (size) or it could be both.
The rocketing growth in payroll loans may be indicative of insufficient income or of the temptation to spend more with the assumption of a linearity of employment and depressed interest rate conditions
At the end of the day, while payroll loans represent a small share (13.37%) of consumer loans, this tells us that even from the lower sphere of society, leverage has been increasing in the balance sheets of individuals. Worst such has been taking place at a significant accelerating scale. In short, employees are borrowing heavily from the future to spend today.
That’s the essence of the Philippine growth story.
