Monday, October 20, 2014

Reserve Bank flying blind as the Coalition starves the ABS

So contemptuous was the Coalition of the Australian Bureau of Statistics that a few years back it outsourced the provision of its economic statistics to Channel Nine.

In the midst of the 2010 election and just days after the ABS had released the official inflation figures it issued a press release headed "Groceries Rise by over 10 per cent in past year under Labor".

Its source was the Channel Nine.  Nine had "independently demonstrated" that grocery prices have risen by 10 per cent in just over a year.

Whereas the ABS found that the price of a two-litre bottle of milk had climbed 0.1 per cent, the Nine Today Show had found it had jumped 96 cents (a percentage comparison is not available). Whereas the ABS found that the price of food in general had climbed 1.4 per cent, Nine found it had climbed 9.3 per cent.

Never mind that the ABS had personally visited around 10,000 stores to enter prices into handheld computers, never mind that the ABS had surveyed the prices of 100,000 separate goods, never mind that it weighted those prices in accordance with actual spending patterns, Nine had surveyed one basket of goods in one supermarket 12 months apart. Why bother with the ABS?

It'd be nice to think the coalition's attitude changed on taking office.

Yet within months in January its employment minister Eric Abetz was warning of a "wages explosion". He didn't say where he got the data from. It can't have been the ABS. It had wages growing at 2.7 per cent, down from around 4 per cent a few years previously. The rate has since slipped to 2.6 per cent...

The truth ought to matter to the government, especially the truth about the economy. It certainly matters to the Reserve Bank. It meets once a month to make just about the most important economic decision of the lot. Its two most important inputs are the official employment figures and the official inflation figures. And it's increasingly flying blind.

A decade ago the ABS surveyed 30,000 households each month to determine who was working and who was not. It kept going back to them until it got a response rate of 97 per cent. Now it surveys 26,000 households and accepts a response rate of 92 per cent. At the same time it's been fiddling with the way it interacts with those households, switching from phone calls to emails to save money.

As recently as March it was insisting the changes had affected the quality of its figures little. Then came August and a literally incredible jump of 121,000 in the number of Australians officially employed, an all-time record. At face value it suggested Australia had created 27 jobs every 10 minutes right around the clock for an entire month. The September number was an even bigger humiliation. If the figure had been presented normally it would have shown an even bigger collapse in employment of 172,000 people, meaning 40 jobs were lost each 10 minutes.

Something has gone horribly wrong. The ABS has called in outside consultants to help it work out what. In the meantime, the Reserve Bank is increasingly operating in the dark. Had it been less cautious and jacked up interest rates this month on the back of the published all-time jump in employment it would have shifted Australia's entire interest rate structure on the basis of a delusion.

The inflation figures suggest the Reserve Bank shouldn't be pushing up rates, but there's a chance the figures are misleading as well. Just about the entire developed world calculates inflation monthly. The ABS does it only quarterly, even though it has begged the government for the funds to do it more often. When the figures are occasionally misleading (the Reserve Bank points to a "couple of instances of quarterly readings for inflation that subsequently proved not to be representative of the general trend") the mistakes have remained official for an entire three months.

Australia's next inflation figure is out on Wednesday. New Zealand's is out on Thursday. The New Zealand figure will be shiny and new. Every three years it adjusts the "weights" it gives to different categories of spending in accordance with changes in consumer behaviour. Australia's ABS does it only every six years, a deterioration from the previous five years in order to save money. The current weights reflect spending in 2009-10.

The Coalition has been missing in action. It cut another $68 million from the ABS in this year's budget on top of $10 million cut by Labor on the way out, apparently unconcerned about the effect on statistics and its own ability to manage the economy. The head of the ABS bowed out in January and the best part of a year later hasn't been replaced. His last public statement, recorded in his last annual report said he had barely enough money to "keep the lights on".

In The Age and Sydney Morning Herald