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Tuesday, 09 November 2010 07:45

The famous economist, Lord John Maynard Keynes, taught us that economists should “study the present in the light of the past for the purposes of the future”.  This is what forecasting economists do for a living.  Keynes also cautioned economists “to be as humble as dentists”.

There were about 180 (fairly) humble economists attending the CIRET (Centre for International Research on Economic Tendency Surveys) economic conference.  They came from 52 different countries.  Why were they humbled, one might ask?  Because none had foreseen the Great Recession that struck in September / October 2008, even as we gathered at the 29th CIRET Conference in Santiago, Chile, in October of that year.  (Read more about the exceptional economists who actually did foresee the financial crisis in the Appendix to this Report).

Whilst economists had been humbled, they had not been idle during the intervening two years.  Hence, several papers were read at the conference dealing with the development of leading indicators for the financial markets.  Indeed, the theme of the New York conference was “Economic Tendency Surveys and Financial Markets”.

Business cycle analysisProf Francis X. DieboldThe keynote speaker, Prof Francis X. Diebold of the University of Pennsylvania, read a paper entitled “Real-time Macroeconomic Monitoring” in which he focused on “nowcasting” as opposed to “forecasting”.  Nowcasting, also known as “real-time forecasting”, is aimed at determining at which point you find yourself in the business cycle.  This is a familiar challenge facing economic forecasters and lends credence to the business surveys undertaken regularly by the members of the CIRET  organisation.  The research of Prof Diebold is focused on helping real people make real decisions in real time.  He stressed the fidelity of the time series data used in economic analysis and pointed out that statistics with a higher frequency are  generally more useful in real-time forecasting.  Thus, data available on a daily basis would be more useful for real-time forecasting purposes than quarterly data that lag by three months.  Prof Diebold also mentioned that his quest was to find, from a multi-data set, five to eight reliable factors underlying the course of the business cycle.  In response to a question whether the US economy had undergone a structural change during the recent Great Recession of 2008/09, he answered that he believed that “this business cycle was  not different, but it was certainly severe”.

Overall, about 110 papers were delivered on topics dealing with the methodology of business surveys, coincident and leading economic indicators, economic tendency surveys and financial markets, consumer tendency surveys, real-time monitoring and forecasting, innovative activity and econometric models. Several papers of special interest to South African readers are mentioned here.   The first dealt with the weighting system applied to the responses of participants in surveys undertaken by the Bureau for Economic Research.  It was found that with different weights allocated to different size firms, the results differed only marginally.  A researcher from the South African Reserve Bank developed a composite leading indicator for dating business cycles in the SA manufacturing sector.  A researcher from Taiwan showed how to improve the timeliness of turning signals in the business cycle by using monthly data.  This highlights the importance of key leading indicators tracked by MFA on a monthly basis (e.g. vehicle sales, building plans passed and the SARB composite index of leading indicators).

An interesting paper was presented by Dr Richard Curtin, Director of Consumer Surveys at the University of Michigan.  Using data from a consumer study undertaken in 2007 and comparing it to a follow-up study in 2009, he found that consumers’ knowledge about Dr Richard Curtineconomic tendencies, derived from the newspaper and TV media, improved only slightly during a time of financial crisis.  The 2007 study found 34 national newspapers with a circulation above 400 000 daily copies.  In the 2009 study, only 27 national newspapers could be found with a daily circulation above 250 000.  One conclusion:  the number and circulation of daily national newspapers is dropping in the USA.  Another interesting fact:  contrary to common belief, the CNN and Fox news channels constitute only 13% of total TV viewership in the US.  Finally, the conclusion Dr Curtin came to was that the majority of consumers gather their knowledge of economic tendencies (e.g. inflation, unemployment) from private sources (e.g. price increases in supermarkets, a neighbour who was retrenched).  One of the startling findings was that US consumers as a group could generally forecast the future inflation rate more accurately than economic forecasters in the US!

In the conference sessions relating to tendency surveys and financial markets, several researchers focused on developing leading indicators to identify asset bubbles ahead of time.  An Italian researcher from the European Central Bank presented a paper entitled:  “Trusting the Bankers:  A New Look at the Credit Channel of Monetary Policy”.  It was shown that the lending behaviour of banks fluctuates over the course of the business cycle.  This paper is of special interest to us in the SA housing sector because we know that the two most important drivers of housing demand are mortgage rates and the availability of mortgage finance.  Homeowners should be made aware of this to avoid hardship during a credit crunch.  Referring to the housing bubble in Spain, an economics professor from Madrid showed that economists in the private sector and in government departments missed the onset of recession in Spain, even though the downward trend in key economic indicators was staring them in the face.  He explained that “no one wants to be a party pooper!”

Attending this conference was certainly worthwhile.  It focused on business cycle analysis, theory, measurement and practice.  With multiple sessions running concurrently, it was not possible to attend all the presentations spread out over three days.  Nevertheless, as most conference-goers would admit, the great value of such gatherings is found in the networking that takes place amongst like-minded people in the same profession.  If there is one aspect that deserves special attention, it is this:  too few researchers at the CIRET conferences relate their research findings to issues surrounding economic policy and decision-making.  As Keynes said, by implication, one should not just study the past, but also learn from history to make wise choices about the future.

1  Points to ponder
The following question usually arises during a severe economic recession:  Is there a structural change in the macroeconomy, or is it (just) a severe cyclical downswing?  This is an issue familiar to forecasting economists with a long memory.  Take, for instance, the years 1975 -1977 in South Africa.  At that point the country was experiencing its worst recession in post-war memory.  Negative factors contributing to the recession were, inter alia, the drop in the gold price in 1974, the political upheaval caused by unrest in Soweto (1976) and subsequent trade boycotts.  That it was not a structural adjustment in the economy, but rather a severe cyclical downturn, emerged later on when the gold price rose sharply and the economic growth rate soared to 6.6% on average in 1980.  By contrast, the downfall of communism in 1989, the slashing of import tariffs and the growth of globalisation could rightly be described as structural changes affecting the South African economy.  The 1989/93 cyclical downswing in the economy was protracted, but not as severe as was the 1975/77 recession.  The 2008/09 cyclical downswing in the South African economy has been particularly severe and people are again asking whether structural change has taken place.

Economists are asking the same question about the US economy.  The fears arise as jobs are being lost, first to Mexico, now to China.  The motor industry in Detroit has suffered severely.  Ironically, the casino industry in that region is growing.  Here is a perspective of where the US is headed.  In May 2008, the author of this Report visited Delaware where a large Chrysler plant had been closed down, with the factory and staff parking lot the size of many rugby fields totally deserted, not even a security guard at the gate.  This factory produced roughly 300 000 vehicles per year, about the same number of vehicles sold in South Africa per annum.  The latest news from this part of the world is that the local University of Delaware has purchased this commercial space for future expansion.  This finding illustrates that the importance of the manufacturing industry in the US is declining and that the contribution of the service sector (the knowledge-based economy) is growing.

2  Two economists who got it right
We turn now to two exceptional economists who actually did predict the financial crisis of 2008/09 ahead of time.  The first, and most famous of the two, Nouriel Roubini, is a professor at New York University, situated in lower Manhattan.  According to an interview in the Financial Times (9 May 2010), he gave an important speech to the IMF in the (northern hemisphere) autumn of 2006, whilst the world economy and credit markets were booming.

Prof Nouriel RoubiniHe warned that the “United States was likely to face a once-in-a-lifetime housing bust, an oil shock, sharply declining consumer confidence and ultimately a deep recession”, along with “homeowners defaulting on mortgages, trillions of dollars of mortgage backed securities unravelling and the global financial system shuddering to a halt”.  Roubini repeated his warnings at the World Economic Forum meeting in Davos, Switzerland, in January 2007.  We now know that Lehman Brothers folded in September 2008, tipping the global economy into financial crisis.  Prof Nouriel Roubini achieved celebrity status.

The other notable economist who can claim to have got things right before disaster struck is Robert Shiller, a Yale University economics professor. According to Wikipedia (accessed 3 Nov 2010). Shiller co-authored a 2003 Brookings paper, "Is There a Bubble in the Housing Market?".  Shiller subsequently refined his position in the 2nd edition of his book called Irrational Exuberance (2005), acknowledging that “further rises in the [stock and housing] markets could lead, eventually, to even more Prof Robert Shillersignificant declines.  A long-run consequence could be a decline in consumer and business confidence, and another, possibly worldwide, recession.  This extreme outcome … is not inevitable, but it is a much more serious risk than is widely acknowledged.”  Writing in the Wall Street Journal in August 2006, Shiller again warned that "there is significant risk of a very bad period, with slow sales, slim commissions, falling prices, rising default and foreclosures, serious trouble in financial markets, and a possible recession sooner than most of us expected.”  Shiller is famous for the Case-Shiller index of house prices in the US, widely quoted and used by analysts and policy-makers.

3   General observations
Paul Volcker3.1  A highlight of the conference was being addressed by Paul Volcker, 83, the Chairman of the Federal Reserve under United States Presidents Jimmy Carter and Ronald Reagan (from August 1979 to August 1987).  Since February 2009, he has been Chairman of the Economic Recovery Advisory Board under President Barack Obama.  Volcker's Fed is widely credited with ending the United States' stagflation crisis of the 1970s.  Inflation, which peaked at 13.5% in 1981, was successfully lowered to 3.2% by 1983.  Volcker has been known to defy the stereotype of a Wall Street insider. A profile in The Week magazine for February 5, 2010, claimed that Volcker doesn't even buy the conventional wisdom that "financial innovation" is necessary for a healthy economy. In fact, he likes to say, "The only useful banking innovation was the invention of the ATM."  At 6 feet 7 inches tall, and despite his advancing years, he remains an impressive and formidable character.

3.2 Where does the name Wall Street come from?  The delegates at the conference were hosted by the Federal Reserve Board for dinner, just a stone’s throw from Wall Street.  According to our guide, the Dutch colonized Manhattan in the sixteen hundreds.  They built a real wall to keep out the local Indians … and the British!

3.3   Having visited New York in 1979, 1981 and 1982 during doctoral study tours, the author of this Report feels that he is able to compare New York in the early eighties with the city as it appears today.  The improvement is vast!  Mayor Ed Koch was threatening to imprison people with unlicensed guns in 1979, Mayor Rudolph Giuliani actually did clean up the city in subsequent years and Mayor Bloomberg seems to be following Giuliani’s lead.  There is definitely one thing Mayor Bloomberg should do, viz. spend more money on fixing the uneven sidewalks; you could so easily break your toe.

3.4   As readers may be aware, New York is known for its wonderful plays on Broadway.  Times Square, all hustle and bustle, is where you queue for an hour or two to obtain “half price” tickets, but beware, when on the way to the theatre on a rainy evening, the umbrellas come out, and watch out for your eye!

3.5   Construction is gathering pace at Ground Zero, now known as Memorial Plaza, where the Freedom Tower is to be built.  In other parts of Manhattan there are many older buildings being refurbished.  The scaffolding causes congestion on the sidewalks (see 3.4 above), but in typical American business tradition, boards are erected on the sides of the scaffolding … and the space is rented to advertisers.

3.6   Conclusion:  What is the benefit of the CIRET conference for MFA and its clients?  There are several benefits.  Networking has already been mentioned.  Secondly, the benefit of keeping up with trends in business cycle research.  Thirdly, for MFA and its client base, the knowledge that our approach to business cycle analysis, which entails the integration of qualitative and quantitative data sources, is widely accepted and practised in developed countries.  In this way we are always improving our forecasting ability to benefit MFA clients in their own business decision-making.

Heilbroner, Robert. 1972.  The worldly philosophers.  The lives, times and ideas of the great economic thinkers.  4th  ed.  New York: Touchstone Simon & Schuster.

Tett, Gillian.  2010.  Interview with Nouriel Roubini.  Finacial Times Life & Arts Section.  London. 9 May, p3.

Wikipedia, The Free Encyclopedia.  Accessed on 3 November 2010.  Robert Shiller, Yale University economist.

Wikipedia, The Free Encyclopedia.  Accessed on 3 November 2010.  Paul Volcker.

Note:  The local organising hosts were the New York based Conference Board, the body that compiles the monthly U.S. Index of Leading Economic Indicators.  Visit their website   to learn more about this leading economic research organisation.

If you would like to learn more about CIRET, please visit their website

Dr Johan Snyman (on right) with Dr Gernot Nerb, Head of Surveys at the Ifo-Institute, Munich, colleagues and friends since 1982.
Dr Johan Snyman (on right) with Dr Gernot Nerb, Head of Surveys at the Ifo-Institute, Munich, colleagues and friends since 1982.

Published in Economic Indicators
Wednesday, 27 October 2010 08:59

SARB Leading Indicator, Vehicle Sales, Transfer Duty & House Prices


The SARB leading indicator dropped marginally, possibly reflecting some moderation in the economic growth rate …


… yet, the annual percentage increase is very high because of comparative base effects (i.e. current levels are being compared to very low levels a year ago)

SARB Composite Leading Indicator Annual percentage change

Vehicle sales have benefited from World Cup purchases and comparative base effects … the time series plans passed is forming a trough.

Comparison Total Vehicle Sales & Total Real Residential Plans Passed

In percentage change terms, vehicle sales are performing well (+23% year-on-year), partly because of comparative base effects.  In the near future this leading indicator is expected to moderate as higher current levels will be compared to higher levels a year ago

Total Vehicle Sales & Total Residential Plans passed Annual Percentage Change

The trend in the residential property market is still upward …

Transfer Duty at Current Prices

… yet, in real terms, the revival is not as robust as was the case in 1999 because mortgage finance is currently scarce

Rand Million at Constant 2009 Prices

In percentage change terms the rise is conforming to pattern.  Note that early in the upswing phase of the business cycle the growth rate is robust, but as can be seen in the circled areas, after a while it tapers off.

Annual Percentage Change in REAL Terms

Nominal house price increases are taking a breather

Real house prices are still below their peak levels in 2007

Even though the time series Transfer Duty Paid is more volatile than House Prices, they seem to reflect similar trends – currently positive, but both moving sideways

Annual Percentage Change in REAL Terms

Published in Economic Indicators