By John Kemp
LONDON, May 1 (Reuters) - Statisticians at Britain’s Office for National Statistics (ONS) could be forgiven a little schadenfreude today after the latest batch of manufacturing surveys showed the sector barely grew in April.
The ONS came in for blistering criticism last week after its preliminary estimates pointed to an economy-wide contraction during the first three months of 2012.
Private sector economists and officials from the Bank of England pointed to more upbeat evidence from business surveys to suggest the ONS was being too gloomy and risked damaging business and consumer confidence.
Commentators “knew” or at least claimed to suspect the preliminary estimates for gross domestic product (GDP) were “wrong” and would be revised upwards when more complete data became available. But that is now looking less certain.
The Markit/CIPS Manufacturing Purchasing Managers’ Index (PMI) dropped to 50.5 in April, which is basically indistinguishable from the 50-point threshold which divides expanding activity from a contraction, suggesting manufacturers flat-lined last month.
The PMI for March was also revised down, from 52.1 to 51.9, suggesting the manufacturing sector was growing more slowly at the end of the first quarter than originally thought.
Looking ahead, the new orders index slipped to 49.2, from a downwardly revised 52.4 the previous month, pointing to a possible further slowing of activity in the months ahead.
The survey numbers and the official GDP estimates are starting to converge. But rather than GDP numbers being revised higher, the survey data is starting to look softer.
Following today’s data “it will be more difficult to say that the survey data are more upbeat than the official numbers,” according Investec economist Philip Shaw.
“It makes it harder for the [Bank of England] to continue justifying looking through the official data to look at the surveys, because they are starting to tick down as well,” RBS analyst Gareth Anderson told Reuters.
The ONS numbers could still be revised (in either direction). Assuming the ONS data is subject to (unbiased) sampling errors, the downward revisions to the PMI for March and further loss of momentum in April should have no effect on whether Q1 GDP is revised higher or lower.
But the downturn in the PMI offers cautionary lessons for everyone charged with analysing and acting upon Britain’s economic numbers.
First, it is a reminder not to over-interpret small changes in the numbers such as whether GDP shrank by 0.2 percent or was flat, and whether the manufacturing index is 52.0 or 50.5.
Second, the official GDP data is not invariably less accurate than private sector surveys.
There has been a tendency to assume “government” numbers produced by statisticians in safe public sector jobs far removed from the pressures of the real world must somehow be inferior to measures produced by private sector organisations in daily contact with ordinary firms, but that is pure prejudice.
Third, some commentators have seemed to suggest that gloomy public sector data should be ignored in favour of the more optimistic private sector surveys because this will support fragile business and consumer confidence.
The optimistic Pollyannas want to create a virtuous circle of rising confidence and improving statistics. But even assuming this works, and there is some evidence for positive feedback between confidence and growth (what John Maynard Keynes termed “animal spirits”), a “faith-based” approach to policymaking is extremely dangerous.
Policymakers and analysts should not cherry pick economic data according to whether it fits their existing theories on whether the economy is growing or not, whether austerity is working or not, and whether monetary policy is too loose or needs to provide further stimulus.
There has been plenty of evidence for this sort of cherry picking in both Britain and the United States in recent years.
In the United States, Fed officials were unable to see the housing bubble in 2002-2006, only localised froth, in the run up to the crisis, and are still unable to admit that overly lax monetary policy in 2003-2004 might have contributed to the run up in housing prices, because that interpretation suits the central bank’s low interest rate policy.
In Britain, the Bank of England has persistently ascribed the overshoot in inflation to “temporary factors” while worrying that even a brief slowdown in growth presages a prolonged slump, largely because it fits with the strategy senior policymakers have been pursuing since 2009. As inflation repeatedly fails to fall in line with official predictions, however, this faith-based approach to forecasting is being tested.
The problem with a faith-based statistics and policymaking is that mistakes go uncorrected too long, leaving problems to accumulate until they become impossible to ignore, and wrenching policy reversals.
There is always a strong temptation to “look through” official numbers and dismiss them as wrong, incomplete or lagging, but the risk is that policymakers see what they want to see, rather than what is really there.
So Britain’s statisticians should stick to their careful estimates, and policymakers and commentators should try to resist the temptation to criticise or explain away every piece of unfavourable news.