What are economic indicators all about?

Economic indicators are the key statistics of the economy that reveal the direction the economy is heading, for example, the consumer price index (CPI).

CPI is the headline inflation number used by the Reserve Bank's Monetary Policy Committee to set the repo rate. February's CPI falling back into the government's target range of under 6% (but over 3% since a little inflation is seen as economically beneficial) and the Reserve Bank's confidence that it will stay there for the next two years resulted in this week's 0.5% rate cut.

CPI is also widely used by the general business community in contracts. For instance, when engineering firms pitch for long-term construction projects, they conventionally quote their prices as escalating by CPI as the work progresses.

But CPI is only one of dozens of economic indicators produced by Statistics South Africa.


Besides government statistics, there are opinion polls like the purchasing manager's index (PMI) done by Stellenbosch University's Bureau of Economic Research, to mention one of many other data gatherers.

To get an overview of just how many figures are regularly published to gauge the economy's temperature, a good starting point is all the data the Reserve Bank blends to track South Africa's business cycles (see below).

Along with most countries, the Reserve Bank applies the theories set out by economists Arthur Burns and Wesley Mitchell in their 1946 book, Measuring Business Cycles.

This separates economic indicators into three groups: leading, coincident and lagging.

The coincident indicator offers an alternative to gross domestic product (GDP) as a measure of where we are now. But, like GDP, it is pretty historic by the time it gets published.

The leading indicator looks ideal for investors, since it supposedly forecasts where the coincident indicator will be in 14 to 15 months.

Unfortunately, there's a snag: the most reliable leading indicator tends to be the stock market's all share index.

So, while factory managers can look to the stock market to see if they should be stepping up or cutting back production, share buyers are the scouts who fall over the cliff first.

This causes many investors to agree with legendary fund manager Peter Lynch: "If you spend 13 minutes a year on economics, you've wasted 10 minutes."

Besides the JSE's Alsi, the 13 economic indicators the Reserve Bank uses to calculate the leading component of its business cycle index include the size of the Careers section in the Sunday Times.

How many people get jobs is usually seen as a lagging indicator, because it generally takes six months or longer for jobs to pick up after a recession. But, for some reason, employment is seen as a coincident indicator by the Reserve Bank.

Inflation is not seen as a useful measure of business cycles. It is there indirectly, however, since the Reserve Bank lists the "predominant prime overdraft rate of banks" as one of the seven ingredients of its lagging indicator.

Both the leading and coincident indicators have been rising over the past few months, backing up the view that the economy is recovering from 2008's global credit crunch.

But, worryingly, the Reserve Bank's lagging index appears to have bottomed out in November at 115.1 points and rebounded to 116.1 points in December (the most recent data published). Though too early to say if the lagging index is heading back up after just a month's rebound, this is alarming, since the lagging and leading indicators generally move in opposite directions. So the lagging indicator moving up signals the economy may be headed down again after a short-lived recovery.

The Reserve Bank has found its leading, coincident and lagging indicators trail each other by 14 to 15 months on average.

That the Reserve Bank, along with other central banks, views interest rates as a lagging indicator seems like an admission that they mainly react to what happened over a year ago, instead of pre-empting coming trouble.

Central banks like to pretend they can turn a bumpy economic journey of booms and busts into a comfortable ride by controlling the money tap. But, so far, their success at controlling business cycles is about as good as rain dancers at controlling the weather.

INDICATORS USED BY THE SA RESERVE BANK IN MEASURING BUSINESS CYCLES

Leading indicators

• Manufacturing orders opinion survey
• Inventory versus demand opinion survey
• Business confidence opinion survey
• Factory hours worked opinion survey
• Major trading-partner countries' leading business cycle indicators
• Basket of commodity prices
• Money supply (M1)
• JSE all share index
• Residential building plans passed
• Bond yields
• Gross operating surplus as a percentage of gross domestic product
• Labour productivity in manufacturing
• Job advertisement space in the Sunday Times newspaper

Coincident indicators

• Gross value added at constant prices
• New vehicle and other sales
• Factory capacity utilisation
• Total formal non-agricultural employment
• Electricity consumption and manufacturing and mining production volumes

Lagging indicators

• Value of non-residential buildings completed
• Ratio of gross fixed capital formation in machihery and equiprnent to final consumption expenditure on goods by households
• Ratio of inventories to sales in the manufacturing and trade sectors
• Nominal labour cost per unit of production in the manufacturing sector
• Cement sales in tons
• Ratio of households' use of instalment sale credit to their disposable income
• Commercial banks' prime overdraft rate

Source: Times LIVE