Economists use GDP growth - I prefer the builder’s skip index, I’ll explain this later. Also champagne and caviar sales plus attendance at restaurants in my home town of Cheltenham.
Measuring the economy is the lifeblood to governments who attempt to control it. Fiscal and monetary fans need to know what going on so they can tweak the engine and stimulate demand when needed or dampen if necessary.
How do they do it? It’s a little like driving a car. Tomorrow evening we’re driving down to Cornwall for the weekend – we only live 3 hours away on a good run. Steaming down the M5 outside Taunton the leading indicators of my journey show clearly what’s happening ahead. The windscreen shows my route ahead; my sat nav tells me my journey statistics – how long to go, estimated time of arrival and potential traffic ahead. My dashboard shows me my speed, revs, fuel consumption and any problems with the car.
These are known as lead indicators and are useful in predicting what’s coming up.
Sadly the economy has few of these.
Lag indicators for my car journey are the rearview mirror showing where I’ve come from, miles travelled in the past and average speed, the economical way I'm driving. I can see how many miles I’ve driven.
The UK economy has plenty of these lag indicators that show us what has happened. Harold McMillan was famous as saying that managing the economy is like “trying to look up a train using last years’ timetable.”
- GDP growth based on the previous quarter’s growth and “tidied” a few months later.
- RPI and CPI based on the previous quarter’s inflation.
- Bank of England Base Rates based on past data.
- Standard Variable Rates based on the price that lenders borrow money.
- Balance of Payments based on the previous years’ numbers.
- Unemployment rates based on “sign ons” in the last month.
Everything's behind the times.
The sign of a recession is notoriously lagged. By the time two-quarters of economic retraction have been reported as a recession, we’re over a half year in the future. Ridiculous really and too late for businesses and consumers to do something about it, which is why recessions last much longer as everyone pulls in their purse strings to contract the economy even more.
The answer is to focus our attention on lead economic indicators. That’s why we have:
- Bond yield curves
- Factory Gate Prices
Which few people understand. Instead, observe:
- The number of builder skips in your neighbourhood
- The number of for-sale boards and sold boards in your area.
- Planning permission submissions at the council (check these online) useful if you’re in the Equity Release marketplace as some of these people will need to finance their builds.
- The Champagne index – yes, it is published to show how much champagne has been imported.
- How full restaurants are during the week and how many offer specials to encourage demand.
I’m sure you can think of some more.
Which is why I think we’re heading for a downturn later in 2020, the signs are there. The economy needs a “reset” button as it’s beginning to bubble away – consumer spending is high, unsecured credit is buoyant especially credit card borrowing. Restaurateurs are charging ridiculous prices and builders look at you first before deciding the price.
We do have a Brexit Boris bounce on our plates which will keep things rather bubbly for much of the year, but like all bounces, they quickly come to an end.
So look out for further articles later this summer as I advise how you can prepare for the economic downturn – I should know – I study the economy and have been through 4 downturns in my business life and they all work in a similar fashion.
By the way, we have zero skips in our neighbourhood and plumbers are returning your calls now, builders are available next month too. Signs?