Interpreting ting macro-economic data: Three key pieces of economic data, their significance, and points to keep in mind while deriving conclusions from them
BY AMAR PANDIT, CEO – MY FINANCIAL ADVISOR
A savvy investor should be able to understand macro-economic developments. To do so, he must be able to interpret economic data, which signal changes in the economic environment. Remember that these developments affect the value of your portfolio. The stock market doesn’t just discount sentiments; it reflects macro-economic fundamentals too. Let us try to understand three pieces of data – the Wholesale Price Index (WPI), the Index of Industrial Production (IIP), and the Purchasing Managers’ Index (PMI) – that appear every month.
Wholesale Price Index
InIndiawe use the WPI as the key measure of inflation (unlike a lot of countries that give primacy to the consumer price index or CPI). The WPI index has been created using a representative basket of 676 goods. The base year for this index currently is 2004-05 (revised forward from 1993-94). The WPI reflects the changes in the prices of wholesale goods (which are traded between corporations) and not consumer goods (which are bought and sold by consumers). WPI is the preferred measure of inflation inIndiabecause it uses a wider range of goods and is computed on an all-India basis.
The WPI index is also important because the Reserve Bank of India (RBI) takes it into account while deciding whether to cut or raise interest rates. Besides looking at headline inflation, the central bank also takes a close look at non-food manufactured inflation, or core inflation (which is inflation excluding the prices of volatile commodities such as food and oil).
Moreover, looking below the headline number at the disaggregated figures (primary articles, food, fuels, non-food manufacturing) will provide you a better picture of what is causing inflation. For instance, in January WPI inflation was 6.6 per cent and the latest number for February has come in at 7 per cent. Does this indicate that inflation is re-accelerating? Not quite. Vegetable price inflation had declined excessively year-on-year in January (-43.1 per cent). In February it was back to a more normal level of 1.5 per cent y-o-y. If you remove vegetable prices from the picture, then inflation momentum is still moderating.
Another related aspect about inflation inIndiathat has to be kept in mind is suppressed inflation. Inflation in some commodities, such as crude, is not automatically passed on to consumers. This poses a threat. With crude prices rising in recent times, and given the bloated state of the fiscal deficit, the government cannot continue to subsidise petroleum products beyond a point. Therefore, a revision in their prices appears imminent. If and when prices of petroleum products are revised, inflationary pressures will rise within the economy.
Index of Industrial Production
The IIP tells you whether industrial production within the country is expanding or contracting. Production figures are collected from 700 industries. The base year for the current index is 2004-05. The three main industry groups have the following weights within the IIP: manufacturing (75.5 per cent), mining (14.2 per cent) and electricity (10.3 per cent).
The figure that is widely quoted for IIP (6.8 per cent in January 2012) is the year-on-year percentage change for that month. It comes out with a lag of six weeks, so the January IIP figure came out in mid-March. This figure is a quick estimate. A revised estimate appears a month later.
Volatility and unreliability of data. In recent times, there have been a lot of complaints about volatility in IIP figures (down one month, up the next). No less a person than RBI governor D. Subbarao has lamented that it becomes difficult to carry out policy-making in real time when the data on which such decisions have to be based is flawed. He cited the example of the period between December 2008 and June 2009 when the global financial crisis was at its peak. According to the data available then, IIP was positive. This was contrary to RBI’s assessment that industrial production was decelerating on account of the crisis. When the new series with base year 2004-05 came out later, it showed deceleration in industrial production during that period. Policy-making indeed becomes difficult when important decisions (such as whether to cut interest rates) have to be based on unreliable data.
The reasons for poor-quality data are two-fold. One, the data series may become outmoded. As time goes by, some industries become bigger and more important while others languish. Therefore, the weights assigned to them in the index no longer reflect the reality and need to be revised. New industries that have risen to prominence also need to be incorporated in the index. Already there is talk of revising the 2004-05 series to a new one with base year of 2009-10.
A bigger problem (this is endemic to all developing nations but is more pronounced inIndia) lies in the quality of data that is collected. Data is collected from a large number of industries under administrative arrangements. Ensuring accuracy and timeliness of reporting is a big challenge.
For the moment, since we have to go by the data that we have, one should not rely on a single month’s data. Look at several months’ figures before arriving at a conclusion about whether a certain trend is emerging (currently, for instance, the big question is whether the slowdown in industrial production is behind us).
Another point to remember about both the WPI and the IIP is that both give year-on-year percentage change for a given month. Hence, both are subject to base effect. If the base was high last year (for a given month), it would mask the inflation figure for this year, even though in absolute terms inflation may still be high.
Purchasing Managers’ Index
A third figure that gives an idea of whether the economy is growing or contracting is the Purchasing Managers Index. Actually there are three PMIs – manufacturing PMI, service PMI and a composite PMI. InIndiathese numbers are brought out by HSBC and a research agency called Markit.
The point to remember about the PMI is that it is a leading indicator. An expansion in the manufacturing PMI signals that industrial growth will accelerate in future. Another point to note is that a PMI above 50 indicates expansion, while a figure below 50 indicates contraction.
Having read this primer, I hope you will have an easier time interpreting economic data and understanding the emerging macro-economic scenario.