Be mistrustful of the ONS data on economic growth
BY THE time you read this, I will have been to see a play, The Doctor’s Dilemma. To enter into the atmosphere, I’ll have to embrace a willing suspension of disbelief. Inevitably, the fiction of the play will conflict with the reality of what I know – or, more precisely, of what I think I know – but a little mental agility should allow me to submerse myself in the story. But, to be honest, many plays test beyond reasonableness my willingness to do this.
Moving onto rather more prosaic matters, what we seem to know about the economy is that it has been shrinking. Factual support for this comes from the GDP data. With the publication of the dire numbers for the three months to June 2012, the Office for National Statistics (ONS) is suggesting that output contracted for three consecutive quarters.
We tend to be more convinced by the seemingly hard facts that are represented by trends in economic output than by some of the softer economic numbers, such as employment. This is understandable, perhaps, as economic output would appear to be the bottom line. But most data are collected by survey, and most are subject to revision. Look back at GDP data during the first decade of this century, for instance. The average revision to the first-published quarterly estimate of the year-on-year growth rate has been +0.4 per cent. The reliability of first-published growth estimates should be severely questioned.
Another angle to current economic developments is provided by labour market data. Think about the implications of the following:
employment in the private sector rose by 254,000 (during the final quarter of 2011 and the first quarter of 2012);
the employment rate for all people over the age of 16 edged up from 57.8 per cent at the end of the third quarter of last year to 58.1 per cent in the three months ended May;
the number of private sector job vacancies seems to have been stable at around 370,000 since September;
total hours worked in the UK rose 2.6 per cent between the three months to September 2011 and the three months to May 2012 (hours worked per person increased 1.6 per cent over the period);
the total domestic expenditure increased 0.4 per cent in the fourth quarter of 2011 compared to the third and rose another 0.7 per cent in the first quarter of 2012; and,
market sector productivity is estimated by the ONS to have dropped 1.1 per cent in both the final quarter of last year and the opening quarter of this year.
If you only had access to the numbers above (excluding those for productivity), what conclusions about the state of the economy would you draw? Almost certainly, you would surmise that the economy is growing gently, but consistently.
One set of numbers never tells the full story. You have to look at the whole range of published data (and even then, the mists of uncertainty can be quite dense). So, should I suspend disbelief, or should I jump to my feet and rebuff the story being told by ONS statisticians?
Richard Jeffrey is chief investment officer at Cazenove Capital.