3Q GDP 6.2% Boosted By Statistical Alchemy from Suppressed CPI, Is the Manufacturing Sector Headed for a Recession?

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.

Attachments area

PSYEi: How 8,200 was Reached!

PSYEi: How 8,200 was Reached!

How to reach 8,000-8,200? Simple, this task is done by consistently executing a marking the close campaign.

The headline index closed the week up 88.64 points or 1.11%. Little is known that 117.78 points (or 132%) of this advance came from marking-the-closes.

Yes, the product of last week’s output came more than entirely from rigging the index.

Well, it is easy to do this. All it takes is a coordinated bid on the Sy Group of companies. 

 

Because the SY Group of companies has been the primary beneficiaries of the engineered pumping, they have been absorbing a significant share of the full market capitalization of the headline index.

The consequence has been to skew the market cap’ weightings towards disproportionately these issues, which now controls a record 31.16%. The first five companies now hold a record 43.6% share of the full market cap.

And this is just the full market capitalization. The index is calculated using the floating market cap, which the PSE has withheld publications to the public last February.  Their market cap share must have ballooned by even more.

 

Interestingly, not only has the board peso volume been decreasing as the headline index is being forced back up to the 9,000 levels, but the advance-decline spread has favored decliners from April 26 to November 8 (average 47 for decliners).

The concentrated pumping on these issues has also been taking volume away from the broader market, thus, leaving less upside participation for non-PSYEi issues.

As one can see, rampant manipulations have degraded or deformed the pricing system of the Philippine capital markets resulting in imbalances of mounting proportions!

3Q CPI Fall to 42-Month Low as Divergences in Component CPIs Widen; Flawed CPI—the Shakey’s Pizza Evidence

Outside show is a poor substitute for inner worth—Aesop

In this issue

3Q CPI Fall to 42-Month Low as Divergences in Component CPIs Widen; Flawed CPI—the Shakey’s Pizza Evidence

-Clashing CPI CORE CPI Outlook: CPI Signals Downside Pressure, CORE Indicates Bottom

-Food and Transport Deflation! Have Consumers Stopped Eating and Moving About?

-Rice Under the Shadow of The Law of Supply; Weak Food Demand and Not a Supply Glut

-Restaurant CPI’s Record Divergence with Food CPI

-Flawed CPI: The Shakey’s Pizza Evidence, T-Bills Defy the CPI

3Q CPI Fall to 42-Month Low as Divergences in Component CPIs Widen; Flawed CPI—the Shakey’s Pizza Evidence

With the government’s statistical inflation, the CPI, falling to .83%, a 42-month low, the administration held its victory lap to claim that “sound and working policies” had been responsible for it. Meanwhile, the Bangko Sentral ng Pilipinas forecasted that “inflation has likely bottomed out” in October, which the consensus agreed.

Clashing CPI CORE CPI Outlook: CPI Signals Downside Pressure, CORE Indicates Bottom

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.  

And because the CPI attempts to create one-size fits all or an aggregated number from a complex network of interdependent disparate individuals, operating on distinct and shifting perceptions, ever-dynamic preferences, and that drive their actions, it is nothing more than a meaningless statistic.

Primarily because of the deflation in rice prices, which in the statistical basket constitutes the largest component with a 9.57% share, the headline CPI has dropped to this level.

In response to the 2H 2018 rice crisis, true enough, the National Government overhauled barriers to rice imports by replacing quota with tariffs, which resulted in an avalanche of supply, and subsequently, the reported contraction in rice prices.

Figure 1

Yet the number is nothing more than statistical contraption barely representative of reality.

With its statistical construction disproportionately skewed towards food prices, the negative divergence between the headline and its CORE component has reached unprecedented levels, which occurred again in October. (figure 1)

Despite falling to 2.65% from 2.75% in September, the CORE CPI remains elevated adrift at 2018 levels and in the proximity of the 2014 pinnacle.

Though food prices, which drive the headline CPI, tend to run ahead of the CORE, especially during the upside, their gyrations tend to exhibit tight correlations. That is, the positive spread between the headline index and the CORE eventually narrows. And the scale is limited when it inverts.

Such interactions appear to have been disrupted by the sharp deflation in rice prices. Rice prices contracted by 9.7% in October.

As an aside, it’s a wonder how many people have experienced any such price decline [year to date -2.1% or month on month -.8%]?

Well, based on statistics, this time is different!

So while the general prices, as demonstrated by the headline CPI, have been suggested to have undergone substantial downside pressures, the CORE CPI asserts little of these.

But does it matter? For the consensus, it’s all about the headlines.

Predicting a “bottoming out” in the CPI, because of this gross distortion, is a piece of cake, ain’t it?

Food and Transport Deflation! Have Consumers Stopped Eating and Moving About?

Two of the CPI’s components dropped to the subzero zone.

 

Figure 2

Food prices contracted for the second straight month! It was -.86% in October from -.94% a month back. And accompanying food prices have been the deflation in transport CPI, which also registered -1.57 and -.93% over the same period. (figure 2, upper window)

And the deflation in food CPI has not been just about rice prices, but the downside pressures spread ironically even to meat prices!  As if the African Swine Flu did not even exist! Meat CPI was just 2.7% YoY or .4% MoM! Vegetable prices were in deflation too at -.8% YoY! (figure 2, BSP table)

And there had been little signs of substitution, where people shifted from pork, to avoid AFS, to other food items. Instead, because suppressed demand, says the Food and Beverage CPI, people practically went on a diet!

Incredible!

Figure 3

Heck, with the record borrowing spree, what had consumers been spending on??? Buying cars and luxury goods at the expense of food? Starve to elevate one's social status through positional goods?

But how about the poor? Have they been practicing abstinence? And has this been the reason why statistics say that “fewer families experience involuntary hunger”?

Rice Under the Shadow of The Law of Supply; Weak Food Demand and Not a Supply Glut

How about the supply side?  Has there been in a deluge in food supplies?

Have people in the cities been growing vertical farms?

However, the National Government’s PSA says domestic food production has barely grown. In the 3Q, the sector grew by just 2.87%.

The PSA’s GDP shows that as well. Nominal agricultural output was even negative (-3.6%) in the 3Q, however because of the magic PCE deflator, real output turned into positive (+3.1%) lead was turned into gold!  The alchemy of statistics! (figure 2, lower pane)

So reduced nominal revenues of farmers have transformed into growth according to statistics! Statisticians should tell farmers to eat and live by statistics!

Separately, domestic Palay production has contracted in the 3Q. Palay real GDP production decreased by 4.2%, while current priced GDP data showed an output slump of 29.4%!

And nor has slowing overall imports been about a shift towards a barrage of food imports. Nondurable consumer imports, which consisted of food and beverage, declined 4.8% in September. Food and live animal imports shrunk by 7.5% in part because rice imports contracted by 53%!

The thing is, the rice episode exhibits the law of supply in motion. The law of supply states that as the price of a good or service increases, the quantity supplied increases, and vice versa.

And in response to the rice crisis or the spike in rice prices, the administration opened the floodgates that ushered in an initial barrage of rice imports. The ensuing deflation in rice prices demonstrates the next stage of the law of supply: as the price of the good decreases, the quantity supplied decreases.

Hence, rice imports and production output has been down. Economics 101!

And although the NG’s statistics have been broadcasting deflation in prices, the contraction in imports and production output must have been accelerating the ongoing drawdown of rice oversupply.

The reported deflation in rice prices is, thus, about to end.

And overall, falling prices amidst stagnant agricultural or food production and imports point to a problem of demand.

Restaurant CPI’s Record Divergence with Food CPI

Another facetious aspect of the CPI is the incoherence of its components, the Food and Beverage CPI with the Restaurant CPI. While the Food CPI controls 38.34% of the basket, Restaurant and Miscellaneous services hold the third-largest share with 12.59%.

The restaurant CPI supposedly signifies the price rate of change in the consumer's spending on food outlets. Resto CPI was 2.88% in October, slightly lower than 2.97% in September. In contrast, deflation in food CPI occurred in the same period. (figure 4, upper pane)

Figure 4

Echoing the headline and the CORE CPI, the variance between food and resto CPI has dropped to the unseen levels. (figure 4, lower window)

But why the glaring dissonance in the spending pattern of consumers in the context of restaurant and non-restaurant food expenditures?

Are food prices in the resto industry price inelastic (or unaffected by changes in demand or supply)?

If the little scathed resto CPI translates to relatively more demand, wouldn’t this influence the market prices of food that should have been reflected on the consumers?

Or has the coordinative function of the pricing system between consumers and producers broken down?

And wouldn’t such glaring disparity be a boon to the profit margins of the food retailing industry?

Flawed CPI: The Shakey’s Pizza Evidence, T-Bills Defy the CPI

Figure 5

Shakey’s Pizza 3Q 17Q gives us a clue as to the relevance of the CPI. (Nota Bene: PIZZA is the first and the only food chain to report on the 3Q Financial Statement last week.)

Have PIZZA’s margins spiked because of this extraordinary CPI spread aberration?

In the 3Q, BSP’s CPI fell to 1.7% from 3% in the 2Q and 3.8% in Q1.

On the other hand, PIZZA’s gross profit margins increased modestly by 69 bps to 26.5% from 25.81% in 3Q of 2018.

However, as the CPI jumped from 2% to 6.2% in the 3Qs of 2016 to 2018, PIZZA’s 3Q profit margins tumbled from 33.22% to 25.81% over the same period.

That said, the recent crash in the CPI has hardly magnified PIZZA’s margins.

Since 3Q 2019 CPI at 1.7% has been below the 3Q 2016 CPI of 2%, PIZZA should have at least regained its 2016’s 33% profit margins.

Here’s the thing, while lower prices in the early quarters have helped improve marginally PIZZA’s margins, the firm acknowledged the challenge of rising costs in the 3Q.

From the PIZZA’s press release: “We are pleased with the results of our initiatives to trim down unnecessary expenses and run a leaner, tighter ship. Year-to-date, raw materials have also moved in our favour adding extra upside to our margins. Nonetheless, we are bracing ourselves for a more challenging year-end with some of our main input costs on an upward trend,” said President and CEO Vicente Gregorio.” (bold and underline mine)

Disinflation or no inflation in the 3Q? Only in statistics!!!

And has the lower CPI bolstered demand for Pizza’s products as indicated in the GDP?

From the same press release: “Same-store sales growth (SSSG), however, remained flat with PIZZA withholding from raising prices during the latest nine-month period.”

Hence, PIZZA’s sales growth came from “new store openings in second-tier cities - in line with the Company’s push to expand in under penetrated areas of the country.”

9-month systemwide sales and revenues grew 9% and 7.4%, the lowest in three years, yet was bumped up by 3Q sales, which jumped 13.6% from its latest acquisition, the Peri-Peri Charcoal Chicken chain. The company’s domestic outlets expanded 18.4% to 263 and added one abroad, as of the end of September.

Expanded demand from consumers? Only in statistics!!!

Though as a chained pizza full-service restaurant with a 64.2% share of the market, according to the Euromonitor, I understand that PIZZA may not represent the whole industry.

However…

Not only have the fundamental premise and logic behind the statistics been flawed, but these numbers have been detached from the real world as proven by micro-evidence.

Hence, sorry guys, that CPI thing has been misstated.

With T-bills holding steady in the face of a crashing Headline CPI, not even the treasury markets (BVAL rates) believe these numbers! (figure 5, lower window)

Attachments area

The Bloomberg Calls On The Peso

The Bloomberg Calls On The Peso

 

Please do observe that since 2014, declining bank credit expansion has led to bumper real yields.

Bumper real yields mean that the National Government hasn’t benefited from the inflation tax. 

 

The National Government’s record massive cash hoarding was partly responsible for that.

Headline statistical inflation did play a role, although hardly anyone had seen the growing divergence between the core and the headline.

Finally, the great global bond boom, which sent yields tumbling, likewise had a role.

In sum, NG's cash hoard, disinflation, liquidity crunch, lower growth, panic buying treasuries equals bumper real yields!

But recent data showed that the BSP has monetized the NG’s fiscal deficit last September, sending its QE to a record high!

If the BSP has jumpstarted the second leg of its secret weapon, how long before the USD Php sniffs the return of inflation?

 

The Philippine Treasury market correctly predicted the burst of and the subsequent slowdown in inflation, could they be wrong this time?