One of the themes of this website has been that Gross Domestic Product numbers are far less reliable than is commonly perceived. Indeed we have discovered that there is quite a litany of flaws in using them as a measure of economic wellbeing. Today I wish to simply concentrate on the issue of how accurate they are and in particular how accurate one of the building blocks of it which is the construction series is. Before I do so I would like to point out that under the new ESA 10 definition it would appear that GDP in Spain has seen a trim this morning.
#BREAKING Three tonnes of cocaine seized in Spain, 12 arrested: police
Has anybody informed the police services that they are the enemies of modern GDP measurement?
US Construction Output
Yesterday saw quite a change in the official US construction data released by the Census Bureau. In its own inimitable style Zerohedge reported it thus.
That all changed today when the US Census released its latest, November, construction spending data, which not only missed expectations of a 0.6% increase, but tumbled -0.4%, the most since June of 2014, while all the recent changes were mysteriously revised lower.
Of course this poses a question for the US Federal Reserve and its plans to continue to increase interest-rates. This was enhanced by John Williams of the San Francisco Fed who told CNBC this “I think something in that three to five rate hike range” can be expected in 2016. By the way John most people call that four…
As ever there is more than one way of looking at data so let us move on from the “end of the world as we know it” style of Zerohedge and look at the numbers themselves. If we do so we see that the construction output series in the year to October has been revised downwards from an annual growth rate of just over 13% to one of just under 11%. Accordingly we see that construction output was still growing strongly but there has been a trim. This continued into the November numbers which posted a decline of 0.4% on a monthly basis but were still 10.5% higher than a year before. So our first lesson is that there has been a slowing of the fast rate of growth but that care is needed with individual monthly numbers as what has just happened shows that they are unreliable.
The numbers can be looked at another way which was not in the Zerohedge article and they are illustrated by this. The old October 2015 output was 1,017,381 million dollars and the new is 1,127,040 million which last time I checked was a larger number! So the new series has in fact raised output by 1.8% compared to the past. If we look back we see that the boost came from December 2013 onwards as before the series was lower going back a couple of years rather than higher.
If we look into what caused this it was the private residential improvement spending series which has been revised back to January 2005 due to a “processing error”. If we return to GDP implications we see that the numbers for more than 10 years ago have just changed and back then they changed by around 1%. The precise series concerned changed by 1.7% back then and by 7% in October of this year. Thus in Taylor Swift terms there has been this.
Oh, oh, trouble, trouble, trouble
Oh, oh, trouble, trouble, trouble
So we see that there is a Good a Bad and an Ugly to this. The good is that the US Census Bureau has discovered its mistake and put it right so strike one for welcome honesty, and this is added too by output being higher than before. The bad is that even the numbers for 2005 have just been declared to be wrong and the whole series up to now has been changed by 1.7% with differing changes on its journey. The ugly message comes as we consider such a change (1.7%) when the GDP number it goes into is analysed in bites of 0.1%. Also as housing is a physical object it should be relatively easy to count as opposed to the inanimate concept of services which poses worries about what might be going on there.
If we move to the overall issue of housing and its impact on the US economy then the National Association of House Builders puts it thus.
Historically, residential investment has averaged roughly 5% of GDP while housing services have averaged between 12% and 13%, for a combined 17% to 18% of GDP.
There is another issue here as if we have trouble counting houses and bricks what about the impact of trying to impute rents? Also for 2015 construction output was of the order of 4% of GDP.
The series here has seen its own problems as I pointed out on the 22nd of July last year.
Firstly the picture in the United States changed yesterday when the level of industrial production was revised down by 2.5% (2012 and 2013 both saw 1% falls).
I brought more detail to the table when I looked at the problems of first world manufacturing on the 2nd of December.
The downwards revisions exclude some high-tech industries where the numbers are oddly troubled and reduced 2012 by 1.7%, 2013 by 1.6% and 2014 by 0.5%. They also implied the full data set for 2014 was not yet in, begging the question if it might also see a more substantial revision.
We are in the zone of up down flying around here as we note that construction has overall been revised up as industrial production was revised down. Again as these are actual things one would think that they are easier to measure than the service sector which of course is much the largest piece of what we consider to be a modern economy.
UK construction series
This is a much more troubled series than the US version. Back on the 12th of June I pointed out another problem in what has become a long list when first quarter output was revised up from -1.1% to -0.2%.
the incorporation of late data, new seasonal adjustment parameters and the introduction of an interim solution for deflators.
So new seasonal adjustment and a replacement for the deflators which means that something serious is wrong here. Take a look at these numbers from the Construction Products Association also from last June.
In 2014 Q4, on a yearly basis, construction output was revised up to 8.9% from 4.5% in the March release. Similarly, on a quarterly basis, construction output increased by 0.2%, an upward revision from the March release which reported a 2.2% fall in output.
The problems continued in 2015.
In Q1, according to the April release, total construction output rose 4.4% year-on-year compared to a 0.3% fall reported in the March release.
How can one have any confidence in numbers changing by such amounts? This was the road to where I suggested not entirely in jest that I would count cranes myself. If we switch to official language then there have been 3 signs of a change. There is an official steering group looking into it, the national statistics designation has been suspended and a new person has been appointed to oversee the data. Poor Kate Davies has received something of a rugby hospital pass although of course it is also true that the only way is up.
In October the Brickonomics blog reported more signs of trouble.
They added about £1.5 billion to the turnover in cash terms over the months March to July. That’s about 2.4% more over that period than was thought when the count was made a month earlier.
The “headscratching cause?” well ….
it appears in March there was a reallocation of a major business from the services sector to construction. When I say major I mean a firm turning over significantly more than £1 billion a year, probably more like £3 billion.
This poses more questions than answers as we reshuffle the GDP pack but if you think about it there is a danger that this masks the underlying problem by making the series look better without really changing anything. I also note that the planned analysis of why the official series differs so much from the Purchasing Managers Indices was cancelled on the 11th of September last year for “operational reasons” which have nearly lasted for 4 months now.
Today’s article has added to my series on how we should take GDP numbers we much more than a pinch of salt. If we struggle to measure with any degree of accuracy something that you would think would be easy such as construction and indeed industrial output where does that leave services? I did raise the issue of this with the Professor Sir Charlie Bean review of UK economic statistics and if I get a reply I will let you know. After all it must be four- fifths of our economy now.
Meanwhile if you want to take the blue pill then Bloomberg offer this by pointing out that in an analysis of 142 countries GDP data the data quality index has the US in 1st place and the UK 3rd. I would not want to be in 142nd place would you?! Still over to Morpheus from The Matrix.
Let me tell you why you’re here. You’re here because you know something. What you know you can’t explain, but you feel it. You’ve felt it your entire life, that there’s something wrong with the world. You don’t know what it is, but it’s there, like a splinter in your mind, driving you mad.