The Hard Number Index (HNI): The foot comes off the accelerator

Our Hard Number Index (HNI) of the current state of the SA economy indicates that economic activity in SA continues to grow but its rate of acceleration (that is, the forward momentum or speed of the economy) appears to be slowing down and may slow down further if current trends persist. In other words, while the SA economy continues to move ahead it appears to be be doing so a slower speed.

Our HNI is based on two equally weighted, very up to date hard numbers, namely: new vehicle sales released by the motor manufacturers (Naamsa) for May earlier this week and the real value of the notes in circulation at May month end. The notes in circulation figure was released yesterday in the updated Reserve Bank Balance Sheet.

This series we then convert into the Real Money Base by deflating it by the CPI (extrapolated one month ahead). The current level of the HNI and a time series forecast of it is shown below where it is also compared with the Reserve Bank’s business cycle indicator – only updated to February 2012.

In the figure below we show the change in the forward speed of the economy by measuring the rate of annual change in the HNI. This may be regarded as the speedometer of the economy. The fastest forward speed registered recently by the HNI was in late 2010. The foot has come off the accelerator gradually since then, with a further slowdown in forward momentum predicted.

As we show below, it is the decline in the growth of the supply of and demand for notes by the public and banks (adjusted for the CPI) that is slowing the forward momentum of the HNI, more than the direction of the new vehicle growth cycle, which is also trending lower. Growth in new vehicle sales has peaked, but growth is holding up rather well. May 2012 was a better month for the motor dealers than April 2012, even when seasonal factors like number of trading days are taken into account.

However the underlying growth trends are clearly pointing down, as are broader measures of money supply and bank credit growth. This is the case even though the economy may be regarded as growing slower than its potential growth. The Reserve Bank has suggested this will occur in late 2013. The money market has come to predict that the economy may take much longer to realise its potential growth. Decreases, not increases in short term interest rates are now being predicted to help the economy along. Our direction of our HNI supports such a view. Brian Kantor

 

An explanation of the numbers

The HNI and the Reserve Bank Indicator may be regarded as a proxy for the underlying state of the economy. When the indicator registers above a real base value of 100, the economy is producing more goods and services, it is growing, and when below 100 the economy is shrinking. Growth will then have turned negative. As may be seen from the HNI and the Reserve Bank Coinciding Business Cycle Indicator, that hovered around 100 between 1990 and 2002, economic activity did not appear to have expanded at all in SA over these years. Since then the index numbers have remained well above 100.

In 2006 -07 the HNI Index turned lower but still remained well above 100. This indicates that while economic activity was still expanding in 2008-09 it was doing so at a slower rate and that the upper point in the Business Cycle, the period of maximum growth or forward economic speed had passed. The HNI Index turned down before the Reserve Bank Indicator and then picked up forward momentum in late 2009 at exactly the same time as the Reserve Bank Index. This indicated that faster rather than slower growth was under way: the HNI more timeously and usefully than the Coinciding Indicator.

GDP provides another much more comprehensive estimate of the level of economic output and its rate of growth. But based, as it must be, on a large number of sample surveys of activity across the economy, and not on hard numbers, these GDP estimates lag well behind economic events. This is true even of the initial estimates of GDP that capture the headlines but that will be subject to significant revisions. We are already in June and national income estimates for the first quarter of 2012 still are only partly released. These lagging indicators of economic outcomes call for more up to date estimates – hence our HNI. But one does wonder about the usefulness of the Reserve Bank’s Coinciding Business Cycle Indicator, or even its leading economic indicator, that even lags behind the lagging GDP estimates themselves.

The Hard Number Index: Satisfactory but not improving

Economic activity in SA expanded in June, but according to our Hard Number Index of Economic Activity (HNI) the pace of growth may well have slowed marginally rather than picked up momentum.

Our HNI attaches equal weights to two very up to date hard numbers, namely new vehicle sales for June, as released by NAAMSA, and the size of the note issue as at the end of June. The HNI may be compared to the Coinciding Indicator of the SA Business Cycle calculated by the SA Reserve Bank. This indicator, with a very similar lower turning point for the current cycle, is however only updated to March 2011, leaving it well behind current economic events.

Vehicle sales began a very strong recovery in late 2009. Sales of all new vehicles were particularly strong in March 2011. Actual sales that month were 53 478 units, which, since March is usually a very good month for vehicle sales, translated into a seasonally adjusted 50 101 units. Since March 2011 vehicle sales have fallen back significantly from these levels, though sales in June were modestly up on those of May. On a seasonally adjusted basis sales had fallen from the over 50 000 units sold in March to 43 108 units sold in May and recovered to 44 359 units sold in June 2011. The vehicle sales growth cycle appears to have declined significantly with the current annual growth trend around the 10% annual rate, perhaps to recede further.

We have mentioned before that the Combined Motor Holdings (CMH) share price has consistently provided a very good, even leading, indicator of the state of the new vehicle market. This relationship appears to be holding up with the CMH share price having peaked late last year, consistent with the peak in the new vehicle cycle.

While the news about vehicle sales may be regarded as somewhat less encouraging about the current state of the SA economy, the demand for and supply of notes in June is somewhat more encouraging. The Reserve Bank, when it issues notes, satisfies the extra demands of the public for notes, presumably to spend, and from the banks for cash reserves, presumably so that they are able to lend more. Banks in SA do not hold excess cash reserves of any magnitude and so the supply of notes, adjusted for cash reserve requirements, is equivalent to the money base of the system, adjusted for cash reserve requirements, or what is also described as high powered money. This makes the note issue a reliable coinciding indicator of economic activity, with the great advantage of being a highly up to date indicator.

The growth in supply of notes to the economy slowed down consistently between early 2009 and early 2011. This growth cycle appears to have picked up momentum recently. The slower growth in the supply of notes, until recently, was however offset by lower inflation, providing scope for acceleration in the growth in the real supply of notes. This growth was necessary to sustain the economic recovery under way. Now a mixture of slightly higher inflation and slightly faster growth in the note issue has helped stabilise the real money base cycle at about a four per cent rate.

If the economy is to sustain a growth rate that is still below its potential or sustainable rate, a further increase in the rate of growth in the demands for cash, well ahead of inflation is called for. No help in this regard can be expected from lower interest rates. SA does not (alas) engage in money supply targeting or quantitative easing. However it may be hoped that any increase in short term interest rates will be postponed until the demands for and supply of bank credit and the demands for the banks and the public for more cash indicate a clear case for tightening. The case for tightening based on the most recent money supply and credit numbers remains, a very week one. Faster growth in the supply of narrow money, broad money and bank credit deserves encouragement.


To view the graphs and tables referred to in the article, see Daily Ideas in the Daily View:
Daily View 13 July