Abstract
Official economic data covering the Eurozone are inadequate and of poor quality. However, these deficiencies can be overcome by supplementing official data with business survey indicators. The only rapidly available, totally internationally-comparable data covering a wide variety of economic indicators is Reuters' Eurozone Purchasing Managers' Index series, which can be used to monitor key variables such as output, employment and prices for the entire Eurozone economy. NTC Research, the producers of the Reuters Eurozone PMI, is adding developments which improve the economic data available to analysts and therefore help improve economic policy and corporate and financial market decision-making processes.
Introduction
The Eurozone as a single entity is currently poorly served by economic data, especially compared to other developed economies such as the United States, Japan and the United Kingdom. The European Central Bank (ECB) itself regards the amount of data available to monitor the Eurozone economy as insufficient:
In a report last month the ECB complained that "significant shortcomings in Eurozone statistics remain". The bank is now asking academics to submit papers for a conference in November with the ultimate goal of suggesting "ways in which existing measures of inflation and growth in the European Union could be improved."
Wall Street Journal Europe, May 18, 2001
An insufficiency of economic data increases the risk of error in economic policy, business and investment decisions. It is important therefore to examine the deficiencies of the available official data and to identify alternative sources of data that will reduce the risk of misinterpreting economic trends.
The deficiencies of official economic data
The main official source of economic statistics for the Eurozone is Eurostat, the European Commission's statistical agency. Eurostat's data are primarily an amalgamation of data series provided by the national statistical bodies of the Eurozone's member states. The official data therefore suffer the same problems as most nationally produced economic data.
Infrequent publication
National accounts data, from which the most comprehensive and important measure of economic activity -- gross domestic product (GDP) -- is derived, are published only quarterly.
Poor coverage, and notably a bias towards manufacturing industry
Other than the national accounts data, monthly economic series are available, but these tend to focus on the industrial sector and the manufacture of goods. This largely reflects historical factors (many national statistics bodies were originally established as a means of measuring a nation's capacity to produce military equipment at times of war), and the simple fact that it is easier to measure the output of goods than of services, which in many cases are less tangible and more esoteric in nature. A plethora of monthly statistics for manufacturing therefore exists, including order books, output, productivity, exports, employment, input prices, output prices and employee earnings. For the service sector, in contrast, barely any data series are released on a monthly basis for the Eurozone (those that are, are largely limited to employment and employee earnings data). Although effort is being made to redress this imbalance of economic data coverage, progress to date has been slow.
Delays in publication
A third problem associated with economic data published by official statistical bodies is that a significant period of time often elapses before the data are actually published. For Eurozone quarterly national accounts data there is a delay of 60-70 days before the main aggregates, or headline figures, are released. Some ninety days elapse before the national accounts main aggregates are broken down by sector. Quarterly data on employment are published 60-70 days after the period to which they relate. For monthly data, the delays are less marked, but still significant. Industrial production data for the main national economies are published with a delay of 30-40 days (while the industrial production figures for the entire Eurozone are typically released with a delay of almost two months). The most timely data are consumer price figures, with the Harmonised Index of Consumer Prices (HICP) published with a delay of 15 days.
Subject to revision after first publication
Even once the official data are published, they are frequently subject to revision and phrases such as 'the economy grew faster than first thought' remain commonplace in press articles and analysts' briefing notes. These revisions have often been significant and, although increasing efforts are being made by the statistical bodies to reduce the magnitude of revisions, experienced analysts treat the first release of many important economic data series with caution.
Lack of comparability with equivalent measures used for other countries
A further problem associated with official data is that not all statistical bodies use the same methodologies when compiling data. Gross domestic product data for the Eurozone, for example, are compiled using significantly different statistical techniques than equivalent data for Japan. Even obtaining a reliable Eurozone measure of consumer price inflation required a great deal of effort in terms of harmonisation of methodologies among the national statistics offices.
These problems produce a situation where analysts are attempting to monitor the current state of the Eurozone economy using data that are already out of date when published, that cover only parts of the economy (often omitting the most important sectors of a modern economy such as services), which will possibly be revised substantially after first publication and which are difficult to interpret against other countries' data. Perhaps most striking is the fact that the output of the services sector, which accounts for a far larger proportion of Eurozone GDP than manufacturing, is not measured by monthly economic data and analysts must wait nearly three months for the first quarterly data estimates to become available.
Using business survey data to track Eurozone economic trends
While the official data on the Eurozone economy may be flawed, data are nonetheless indispensable for monitoring economic trends. It is therefore common to use supplementary data that provide a more up-to-date indication of economic trends and which fill the gaps in official data coverage. Monitoring such data helps not only to anticipate the forthcoming release of official data, but also highlights instances where official data may be revised after first publication.
A number of business surveys are produced on a monthly basis in the Eurozone, notably the European Commission's business confidence survey. However, while a good indicator of business confidence and expectations, measures of confidence have a mixed history of accurately tracking and anticipating hard data such as economic growth. The use of the EC surveys is therefore somewhat limited. Other indicators that are watched closely by analysts include the Ifo survey of business conditions in Germany, the INSEE survey in France and a survey conducted by the Belgian National Bank. However, it should be noted that these last three surveys are restricted to individual national economies of Eurozone member states and strictly speaking are not suitable for making international comparisons of economic performance.
There is only one rapidly produced monthly business survey that is truly pan-European, fully comparable between Eurozone member national economies and which is not based on polls of opinion or expectations. This is Reuters' Eurozone Purchasing Managers' Index (PMI) series. The use made of the Eurozone PMI by the European Central Bank (it is included in the ECB Monthly Bulletin on a regular basis) and private sector economists in determining economic trends in the Eurozone has led the PMI to become one of the most eagerly awaited and important indicators released each month.
One of the most reliable high-frequency indicators of overall activity in the [Eurozone] is the composite PMI, which covers manufacturing and business services.
JP Morgan Weekly Global Data Watch, October 2001
The Eurozone PMI is derived from a monthly survey of business conditions that is conducted across the Eurozone by independent research company NTC Research Limited. The Eurozone data are themselves an amalgamation of national monthly survey reports produced in Germany, France, Italy, Spain, Ireland, the Netherlands, Austria and Greece. In each country, the panel of survey respondents is stratified to reflect the true structure of the economy in terms of sectoral contribution to total economic output. Within each sub-sector of the economy, the companies are carefully selected to ensure representativeness in terms of company size and geographical distribution. Moreover, care is taken to ensure that response rates are high (in the region of 70-80%) and that the panel of participating companies remains stable over time.
In total, data are collected from over 4,000 companies, with survey respondents requested to indicate the direction of change in a number of survey variables, comparing the situation at mid-month with that of one month ago. The responses to the survey therefore take the form of percentage responses of companies reporting either an improvement, deterioration or no change in each survey variable. These responses are converted into single-figure diffusion indexes for each question asked using a weighting process which ensures that each response carries the correct level of importance in the survey results according to the size of the company to which the response relates and the relative importance of the sector in which that company operates. Diffusion indexes vary between 0 and 100 with a level of exactly 50.0 signalling no change on the previous month. Diffusion index readings above 50.0 signal an increase in the variable on the previous month, index readings below 50.0 signal a decrease. The greater the divergence from 50.0, the greater the rate of change indicated. Each diffusion index is seasonally adjusted.
The key objective of the PMI surveys is to monitor economic growth in the Eurozone accurately in order to ascertain the precise point of the business cycle with the greatest confidence. In this respect there are several important features of the PMI to note:
Monthly publication
The Eurozone PMI is published monthly, facilitating the earliest possible identification of turning points in economic trends.
Wide sectoral coverage
The Eurozone PMI covers services sectors as well as manufacturing, including sectors as diverse as business-to-business services, consumer services, hotels and restaurants, computing, IT, communications, financial intermediation, travel and transport. As a result, the PMI covers in total some 74% of private sector economic activity in the Eurozone.
Wide variety of economic variables
The PMI covers a wide range of economic variables in addition to output or economic growth, measuring important economic trends such as inflationary pressures, employment growth and inventory levels. Time series from the PMI survey include four main series which are weighted averages of the manufacturing and service sector survey results:
- output,
- new orders,
- employment,
- input costs/prices.
For manufacturing, a number of additional variables are monitored, including:
- suppliers' delivery times (a key indicator of the build-up of supply chain inflationary pressures),
- the amount of goods purchased by manufacturers,
- stocks of goods purchased,
- stocks of unsold goods.
For services, additional variables include:
- prices charged,
- levels of outstanding business,
- expectations of future business activity.
Rapid production
The PMI data are published at the start of each month, with data relating to the month just passed. The manufacturing data are in fact published on the first working day of each month, while the services and combined manufacturing and services data are published on the third working day of each month. The data are therefore available about one month ahead of comparable official data on manufacturing output, and several months ahead of the quarterly data on service sector growth.
Factual information
The PMI data series are not based on opinions, expectations or sentiment (with the obvious exception of the service sector business expectations series). Senior business executives are asked to report on actual changes in business conditions compared to the situation one month ago (for example, 'Has the number of new orders received by your company risen, fallen or remain unchanged on that of one month ago?' The PMI data therefore represent the closest approximation of 'hard data' that can be collected through such means.
Not subject to revision
Once published, the raw data that constitute the PMI are never revised. Only minor revisions to the seasonal adjustment factors may occur. Rarely are such revisions statistically significant.
Internationally comparable
A further feature of the Eurozone PMI is that it is directly comparable to other PMIs produced elsewhere in the world, such as the index produced in the United States since the 1930s by the Institute of Supply Management (formerly the National Association of Purchasing Management), and the indexes produced by NTC Research in the United Kingdom for the Chartered Institute of Purchasing and Supply, in Russia for Moscow Narodny Bank and in Hong Kong. PMIs are also produced in Australia, Canada, Singapore, Switzerland, Denmark, Sweden, Israel, Hungary and Poland. A PMI for Japan is also being developed, to be publicly released in 2002. All PMIs are produced using the same methodologies and therefore generate directly comparable economic data.
The track record of the Eurozone PMI
The correlation of the Eurozone PMI against the area's gross domestic product is high. The most common comparison is between the Composite Output Index (the weighted combination of the manufacturing and service sector output indicators) and the annual rate of change of GDP at constant market prices. This comparison (see Figure 1) shows that between June 1998, when the Eurozone PMI was first calculated, and December 2001, the PMI anticipated the GDP four months in advance with a correlation coefficient of 0.93. As the PMI is available two months before the GDP data are published, the PMI therefore anticipates the first, provisional, release of quarterly GDP data by between six and eight months in total.
Figure 1: A comparison of the PMI Composite Output Index and the GDP
) |
The Manufacturing Output Iindex also accurately predicts the equivalent official measure of manufacturing output growth, as shown by Figure 2. The PMI Output Index anticipates the annual rate of change in the official measure by three months with a correlation coefficient of 0.90.
Figure 2: A comparison of PMI Output Index for manufacturing against industrial production
) |
Table 1 shows similar analyses of a selection of PMI output data for other countries, with both the correlation coefficient and the number of months for which the PMI survey data lead changes in comparable official measures. Due to the lack of official data on services, the comparisons are restricted to manufacturing.
Table 1: PMI data for other European countries
| Country | Correlation coefficient* | Lead of PMI against GDP | Time period |
|---|---|---|---|
| Eurozone | 0.90 | 3 months | Jan 1998--Dec 2001 |
| Germany | 0.92 | 3 months | Jan 1998--Dec 2001 |
| Italy | 0.93 | 3 months | Jan 1998--Dec 2001 |
| Spain | 0.88 | 3 months | Feb 1998--Dec 2001 |
| France | 0.77 | 1 month | Apr 1998--Dec 2001 |
* PMI Manufacturing Output Index v annual rate of change of manufacturing output
Other important indicators deriving from the PMI surveys
The PMI survey data provide an accurate advance indicator of the pattern of economic growth, both for the Eurozone as a whole and for the main national economies that comprise the Eurozone. However, the PMI is not restricted to the ability to predict economic growth. It also acts as a leading indicator of employment and inflationary pressures.
Prices
PMI survey respondents are requested to signal whether their input costs have risen, fallen or remained unchanged against one month previously. In manufacturing, input costs are restricted to prices for raw materials, although in the service sector the measure includes staffing costs, which account for the greater share of typical service companies' input costs. The resulting survey index acts as an advance indicator of the build up of inflationary pressures and correlates closely with comparable official measures of input costs and inflation (see Figure 3).
Figure 3: PMI Price Index against Eurostat data
) |
Employment
Survey respondents are also requested to indicate whether their employment levels have risen, fallen or remain unchanged against one month previously. The resulting survey index therefore acts as an advance indicator of changes in the official measure of employment published by Eurostat (see Figure 4).
Figure 4: PMI Employment Index against Eurostat data
) |
Suppliers' delivery times
The suppliers' delivery times index is just one of the indicators published in the manufacturing PMI survey and signals the build up of capacity constraints in the supply chain. Such capacity constraints in turn provide an advance indication of the development of inflationary pressures. For example, during a period of rapid growth, pressure is exerted on suppliers to meet strong demand for inputs from manufacturers. While such strong demand persists, shortages develop and delivery times extend. This is commonly seen as a shift from a buyers' to a sellers' market for such inputs, with suppliers having an increased ability to levy higher prices for their goods.
It is the ability of the suppliers' delivery times index to signal the development of inflationary pressures that has brought the index to the attention of US Federal Reserve Chairman, Alan Greenspan:
Want to know how Federal Reserve Chairman tells if inflation is going to get worse? Forget all those government numbers and the latest murmurings from bond traders. Just look to see if it is taking longer for manufacturers to get supplies delivered.
Mr Greenspan, speaking in congressional testimony, said that suppliers' deliveries are far more relevant than the Fed's own capacity utilisation figures at gauging price pressures in the economy.
Wall Street Journal, 6 April 1996
In the Eurozone, the suppliers' delivery time index clearly has a close (and leading) relationship with the prices paid by manufacturers for their inputs (see Figure 5).
Figure 5: PMI Suppliers' Delivery Times Index against Eurostat data
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Future developments
The information published from the Eurozone PMI survey is currently being expanded. Four developments in particular are scheduled to take place over the next year which will add to the data that are available to monitor and analyse Eurozone economic trends.
Sectoral indices
The PMI survey data from across the Eurozone are being analysed retrospectively in order to provide new monthly time series for a number of important sectors of the manufacturing and service economies which will be released on a monthly basis by NTC Research. These are likely to include:
- Food, drink and tobacco manufacturing
- Chemicals, rubber and plastics manufacturing
- Mechanical engineering
- Manufacture of basic metal goods
- Manufacture of timber, paper and related products
- Manufacture of transport vehicles
- Manufacture of clothing and textiles
- Manufacturing of electrical and electronic goods and instruments
- Financial Intermediation
- Hotels, restaurants and catering
- Business to business services
- Social and personal services
- Communications, travel and transport services
- IT and Computing services
This sectoral breakdown of the data will provide the most detailed monthly analysis of the Eurozone economy ever produced and will help in particular in the analysis of stock market sector economic performance.
Smaller and larger companies indices
The existing manufacturing and service sector PMI surveys in the Eurozone will be analysed to produce time series data by size of company, allowing analysts to monitor and compare economic trends for small, medium and large size firms. No comparable data of this nature currently exist.
Construction sector index
A PMI survey for the Eurozone construction sector is being developed by NTC Research, which will complement the existing manufacturing and service sector coverage. This will extend PMI survey coverage of the private sector Eurozone economy to over 80% and provide the only available source of directly comp-arable construction industry data for the main euro nations.
Productivity indicators
The data on output and employment trends from the national PMI surveys that constitute the Eurozone PMI are to be analysed in order to generate monthly indicators of productivity growth in both manufacturing and service sectors. Such data are already publicly released in the United Kingdom, acting as a reliable advance indicator of manufacturing productivity growth and supplying the only source of monthly service sector productivity growth currently available.
The national productivity indicators will be weighted together to form indicators of total private sector, manufacturing sector and service sector productivity growth in the Eurozone.
Summary
The Reuters Eurozone PMI should be considered as an important tool to assist in the early identification of turning points in the pattern of economic growth and related variables such as order books, prices, employment, stock levels and capacity utilisation. It is through the increasing use of such data by monetary policy makers, corporate planners and the financial markets that economic policy and corporate decision making processes are being improved and resources allocated more efficiently. Such decisions can now be based on more up-to-date, reliable and comprehensive information than has ever been available before.
Moreover, through the introduction of the numerous new developments in the provision of Eurozone economic data that have been outlined above, it is hoped that some of the most obvious remaining information gaps can be filled to provide economic analysts with further useful tools to track economic trends in the Eurozone reliably.
