Friday, June 05, 2009

The ABS busts a new urban myth

And says says it can't contact Gerard Minack

Jiggery-Pokery in Age Article

"I write to express my disappointment that The Age published an inaccurate and misleading article about the Australian Bureau of Statistics and the statistics it publishes ('The 'R' word's already here, and things will get worse', The Age, 4 June 2009, with authorship attributed to Gerard Minack). The author did not check the claims made in the article with the ABS, nor apparently with any other authority familiar with macro-economic statistics.

Many of your experienced readers who are familiar with macro-economic statistics will realise that the claims made in the article cannot be correct. Unfortunately, queries received by the ABS about the inaccurate article indicate that some people have been mislead by it.

The methodology to estimate the volume of bulk commodity exports described in The Age article attributed to Mr Minack is not used by the ABS .

The statement in the article that "Yesterday it (the ABS) announced that it was factoring in lower prices in the March quarter' is not correct. No such announcement was made. Furthermore, given the methodology that the ABS uses to measure the volume of bulk commodity exports, such a claim could not possibly have been correct.

The volume measures of exports of bulk commodities recorded for the latest quarters in the ABS Balance of Payments and National Accounts Statistics are calculated by multiplying the quantities of such exports, as reported by exporters in tonnes or some other unit of quantity, by the average price of such commodities, as reported by exporters in the reference year. For the March quarter 2009 volume estimates, 2006-07 is the reference year for prices. The reference year prices are updated annually, in the September quarter accounts. For example, the September quarter 2009 accounts will use average prices reported in 2007-08. This methodology assures that movements in the volume of bulk exports from one quarter to the next reflect only changes in actual volumes and are not influenced by changes in prices.

The ABS methodology for compiling the volume estimates of bulk commodity exports has been in place for many decades, is very well documented on the ABS website, and well understood by most analysts. In 1997 the ABS moved to update the historic reference year from once every 5 years or so, to once every year -- apart from this the methodology has been essentially unchanged.

The ABS has tried, without success, to contact Mr Minack about the erroneous claims in his article. If Mr Minack had bothered to contact the ABS to gain an understanding of the relevant macro-economic statistics methodology, your readers may have been spared the misleading reporting that appeared in The Age.

I would encourage Mr Minack in future to either contact the ABS or visit our website if he is seeking to understand the statistical methods that are used by the ABS."

Peter Harper
Acting Australian Statistician

"The 'R' word's already here

Gerard Minack
June 4, 2009

Ignore misleading statistics and prepare for some tough times ahead, writes Gerard Minack.

THE March quarter gross domestic product changes very little. In particular, it doesn't change the fact that on any sensible definition Australia is in recession. Nor, more to the point, does it change my view that things will get worse.

The surprise was due to the Australian Bureau of Statistics changing the way it tracks bulk commodity prices. Usually the bureau waits for the major contracts to be settled, and factors in the price changes in the June quarter (because the contract prices are set from April 1). Yesterday it announced that it was factoring in lower prices in the March quarter. Factoring in a lower price implied a higher volume for exports, which lifted GDP. Consequently, net exports added 1.4 percentage points to growth in the quarter. Forget this statistical jiggery-pokery: the key numbers to focus on are national income and domestic demand. Australia's boom was not a GDP boom; it was a national income and domestic demand boom. Yesterday's data confirm that boom is busting. Gross national spending fell by 1 per cent in the first quarter, following a 1.3 per cent fall in the fourth. Real gross domestic income fell by 1.2 per cent in both quarters.

These are the variables that drive domestic profits, employment and the Reserve Bank. The weakness points to further job losses. Ongoing increases in unemployment will keep the pressure on the RBA to keep cutting rates. I think the cash rate target will be lowered to 2 per cent.

A couple of follow-on points. First, the most important thing about exports is total receipts; it doesn't matter whether it is prices or volumes that are driving the aggregate. Yesterday's report confirmed the global bust is finally having an impact.

Second, the recession is starting to affect consumers. Real income is feeling the pinch. Income strength underpinned better consumer spending in the March quarter, but I doubt that spending will sustain its momentum for much longer.

I will be wrong unless there are significant job losses, but yesterday's data is consistent with job losses to come.

Gerard Minack is a Morgan Stanley economist."