Saturday, 18 April 2020

Getting real

We don't have an adequate grasp on the real-time state of the economy. We need much more close-to-real-time data.

That's it. The rest of this post is a riff on the same theme.

As covid wreaks its damage, it would be good to know, now, what that damage is: what's the initial hit to GDP? Where are the worst impacts? How are the knock-on ripple effects going? Among many other things, it would inform how hard fiscal policy needs to fight back. As it is, we - and many other countries - are at the "Oops, did I say $10 billion? I meant $40 billion" stage of Finance Ministers' groping for what the fiscal response needs to be.

Crises apart, we should always have had better high frequency cyclical data than we've actually had. As Michael Reddell said recently in the 'Measuring the slump' post on his Croaking Cassandra blog, "We and Australia are the only two OECD countries without a monthly CPI, our GDP estimates (quarterly only, as with most countries) come out only with a very long lag, we don’t have a monthly industrial production series, and we still don’t have an income-based measure of GDP". These deficiencies have been known for a long time - I can remember discussions over the years at Stats' Advisory Committee on Economic Statistics (since disbanded) - but the debate never got as far as prising open Treasury's chequebook.

Michael had several constructive ideas on how to improve things, including having Stats publish the monthly results from its rolling quarterly Household Labour Force survey, and having Stats also "look at hosting some sort of dashboard pulling together, and making openly available, all manner of formal and informal economic indicators. There have to be lots".

The good news is that at least two parties (though not Stats, yet) have had a go at dashboards.

First out of the blocks was Sense Partners: you can access their latest six-variable dashboard here. It's good, isn't it? I especially liked the electricity generation graph (below). You'd think that it must be reasonably close to the fall in GDP, and is suggesting something like a drop of close to 20% in output since late March (though there may be seasonal stuff going on, too).

They were closely followed by Treasury, who've just put out theirs (media release here, access to the pdf dashboard here). Personally I felt the Sense set gave me more of a real-time feel, though Treasury's information was interesting in its own right, especially the traffic data and the data on uptake of the job subsidy scheme (below).

The next thing that would be really useful would be some composite indicator of all these glimpses of the overall underlying reality. As it happens economists have a nifty way of devising one: it's called 'principal components', and works by assembling a lot of data, hopefully all related (positively or negatively) to some underlying common influence, and then analysing it econometrically to see if you can identify a common background factor.

Treasury's dashboard helpfully included some international data, and one of the series shown was, indeed, one of those composite indicators, for the US. It looks like this.

If you want to follow the series yourself it's here at the Fed of New York site, and there is a (short) write-up of how it all works here. The devisers of the index have calibrated it so that percentage changes in the index can be (give or take) read as percentage changes in GDP, or as they put it, "a reading of 2 percent in a given week means that if the week’s conditions persisted for an entire quarter, we would expect, on average, 2 percent [GDP] growth relative to a year previous". So we know that if early-April conditions persisted for the whole of the June quarter, US GDP would be some 9% lower.

Can we be sure that the weekly economic index does in fact track US GDP pretty well? Yes, we can, as you can see below (this is from Chapter 1, 'US economic activity during the early weeks of the SARS-Cov-2 outbreak', in Issue 6 of the Centre for Economic Policy Research's covid economics series, well worth following).

Two things to finish with.

One, obvs, wouldn't it be nice if someone did the same number crunching on New Zealand data and gave us close to a real-time reading on where GDP has got to? And yes, I'm happy to be part of the effort if anyone feels the urge to get it done.

Two, the wider point about the limited range of our current official cyclical data, and the speed with which what we have gets published, needs to be addressed. You can't go to a competition or regulation conference these days without people blathering on about how 'big data' enables market power, or threatens privacy, but you don't see anything like the same focus on how the torrents of big data could be used to generate near-real-time cyclical gauges.

It's fine to have the business as usual, industrial strength, quality-assured things like the quarterly national accounts. But as Grant Robertson and the lads at Treasury - and the rest of us - are finding out, there's a big role for the cheap and cheerful but timely and informative indicators, too. We've shelled out some $9 billion on wage support: in the greater scheme of things a couple of mill to zero in on where we actually are would be money very, very well spent.

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