5/9/2013: A Cautionary Note on Irish Services PMIs

having just written about the Irish Services PMI performance in August, here's an update on the link between PMI and actual Services Activity Index, published by the CSO (one month lag).

The latest data from CSO on Services Index will be analysed in the subsequent post, but for now a health warning reminder: Services PMI has barely any bearing on the actual Services activities in Irish economy:

Basically, correlation - from January 2009 through July 2013 - between the Services PMI and CSO Services Activity Index is exceptionally poor: it stands at just 0.1367. Services PMI readings have no explanatory power when it comes to tracking performance of the Services Activity Index. On log-changes chart, PMI is capable of capturing just 0.0071% of variation in Services Activity Index. On straight levels even less. Lags are not yielding any meaningful improvements in explanatory power, neither do non-linear models.

In my view, this testifies to the extreme skews in PMI survey data to reflect the role of MNCs in ICT and IFSC sectors here.

3/5/2013: Irish Services PMI April 2013: Some good, some make-believe news

For a change from the declining fortunes of Irish manufacturing (aka, production of at least some real tangible stuff by humans, albeit richly peppered with tax arbitrage), the accounting trick called Irish Services (aka, billing of services sold in Mongolia to Dublin by companies minimising tax exposures in the US) is booming.

Good news for GDP. Good or bad news (depending on capex cycle and financial engineering - as exhibited by Apple 'bond' offer this week, etc) for GNP. Even better news for the Government solemnly incapable of supporting growth at home, and thus solely reliant on Mongolian demand for 'Irish' services and Obama administration lag in realising that another corporate tax amnesty is long overdue (note to the White House: check out Ireland's IFSC deposits).

Latest NCB Services PMI for Ireland published today show continued expansion in Services sector:

• Headline Services PMI rose from 52.3 in March to 55.2 in April - statistically significantly above 50.0 for the first time since January 2013. This marks ninth consecutive monthly reading above 50.0, and sixth time the index is above 50 with statistically significant margin.
• Good news: this time around there was significant growth signaled in Transport, Travel, Tourism & Leisure sector (potentially due to twin effects of The Gathering and the EU Presidency - which should really count as subsidy activities this year). However, another significant driver in upside growth were Financial Services (aka IFSC). Business Services and Technology, Media & Telecoms services both recorded moderation in the rate of growth, as signaled by PMI.
• On dynamics side, 12mo MA through April 2013 for Business Activity headline index now stands at 53.3, with 3mo average at 53.7. Both are below 3mo average through January 2013 which stood at 56.2, so there is still some slowdown in the rate of growth. Latest 3mo average is ahead of same period 3mo averages for 2010-2012.

Per last chart above, 

• New Business sub-index remained practically unchanged at 54.2 in April, compared to March (54.1) with both months posting reading statistically above 50.0 - which is good news.
• On dynamics side, 12mo MA was at 53.7 in April 2013 - a healthy reading, with 3mo MA through April 2013 almost bang on at 12mo average level of activity at 53.8. Previous 3mo average through January 2013 was at blistering 56.5, so there is some marked slowdown in the rate of growth. Nonetheless, last 3 months marked the fastest growth for the same three months period for any year since 2010.
• April 2013 was the ninth consecutive month of New Business sub-index readings above 50.0, with seven of these months posting readings statistically significantly above 50.0.

I will blog separately on employment and profitability in both services and manufacturing so stay tuned for details on these.

Business confidence and New Export Business sub-indices both showed some slowdown in growth, but still remain in rude health. On foot of this, employment growth rate improved:

Overall, sarcasm aside, the Services sectors continued to support economic growth, even though much of this growth is coming from the make-believe tax arbitrage stuff. Still, better have make-believe dosh than none at all. And a welcomed reprieve from the past years' trials for the Travel & Toursim sector too.

One note of caution, though: Irish Services PMI have little to do with Irish Services actual activity levels... see here: http://trueeconomics.blogspot.ie/2013/04/742013-irish-services-activity-index.html

5/3/3013: Irish Services PMIs: February 2013

Irish Services PMI (published by NCB) for February were out today, highlighting some interesting (for a change) shifts in the short-term trends worth discussing.

The headline numbers were good, although less strong than those recorded in January. This is not surprising since PMI surveys are biased toward multinationals in some core driving sectors (due to weighting factors attached to sectors and the overall quality, collection and reporting of data biases).

• Seasonally-adjusted Business Activity (headline index) declined to 53.6 in February from 56.8 in January 2013, but remained above 50.0 line. 
• 12mo MA through February 2013 was 53.0, which is not statistically significantly different from 50.0, but nonetheless represents a reading consistent with moderately strong expansion of activity. This marks the seventh consecutive month of readings above 50.0 although February was the second slowest month for activity over this latest period of consecutive expansions.
• 3mo MA through February is now identical to the previous 3mo MA through November 2012 - both at 55.4. For comparative purposes: 3mo MA through February 2010 was 47.2, through February 2011 - 52.1, through February 2012 - 50.0, so annualised activity is running ahead of previous 3 years.
• Main point to be made in the above is that since roughly April 2010, we have been trending along a new late- or post-crisis trend along the average of 52.1 average (49.6 to 54.6 range) as compared to May 2000-December 2007 average of 57.6 (52.5 to 62.7 range). As charts above and below clearly show, the new trend is (1) lower and (2) less steep in take-offs from the local minima (lows). In my view - this shows two factors: Factor 1: overall slower rate of growth (do keep in mind that the current trend is coming off historical lows of the Great Recession and should be consistent with much faster uplift and higher average and range than pre-crisis trend), and Factor 2: more mature nature of business in Irish Services sectors (with ICT and Financial Services now in advanced stages of late investment cycle compared to the period of 2000-2007 when these were growing rapidly and posting recovery from the dot.com bubble).

Now on to some of the components of the headline index.

• Chart above shows that New Business sub-index also posted moderation in the rate of growth in February 2013 compared to five months of robust expansion prior to February. In fact, February reading of 53.1 was the slowest pace of expansion in seven months, although it does come on foot of seven months of consecutive above 50.0 readings. 
• Trend-wise, the same conclusions that were drawn in the last bullet point on the headline index - those relating to structurally slower pace of growth in the recent years compared to pre-crisis rates of expansion - continue to hold for New Business sub-index as well. Since April 2010, the sub-index averaged 51.3 (range of 48.4 to 54.2) against pre-crisis (May 2000-December 2007) average of 57.4 (range of 52.4 to 62.5).
• On short-term dynamics, 3mo MA through February 2013 stood at 55.4, slightly down on 55.8 3mo MA through November 2012, but ahead of 47.2 3mo MA through February 2010, ahead of 52.1 3mo MA through February 2011 and ahead of 50.2 3mo MA through February 2012.

Chart below summarises the shorter-range data for the two core indices.

Two charts plotting other principal components of the overall index:

Focusing on few sub-series of interest:

• Employment sub-index remained above 50.0 in February, posting a reading of 52.5 - the shallowest expansion since September 2012, but marking a sixth consecutive month above 50.0. 3mo MA now is at 54.1 and previous 3mo MA through November 2012 was at 53.0. Good news - in 2009-2012 3mo MA through February was below 50.0 in every year. Bad news is that Employment is closely linked with Profitability (see below).
• Business Confidence / Expectations 6mo out are continuing to fly high, propelled most likely by a combination of current upbeat conditions (the two series: Expectations and Current Conditions show the strongest co-determining relationship of all series, suggesting that the real driver for Expectations is not actual anticipation of the future events, but rather firms' assessment of current conditions) and by the endless barrage of feel-good propaganda from the business lobby and the State. The last, third factor, is human nature (aka 'winner's curse' bias). We expect things to get better because they were pretty damn awful until now and for a very long time... Come on, folks, let's face the music - unless you are a transfer-pricing arbitraging MNC, things are hardly getting any better. And, unless you live in the world of Googlites (aka 25-30 year olds with no attachment to anything save a party on a weekend) you are facing a mountain of debt, shrinking assets and wealth, higher taxes and the prospect of more of the same. What 'confidence at 69.1' can we have in mind? 
• Oh, and to top things up - you'd think that Confidence comes from higher profits for the firms... Well, in the Wonderland of Transfer Pricing it is not and hence in Ireland we have Services sector where profitability is shrinking (41.5 in February on 49.2 in January) for 62 consecutive months now (since January 2008, every month there was negative profitability growth, with the average shrinkage at 41.9 - aka very very very deep contraction), but businesses confidence has been up on average at 60.9 - aka very very strong confidence growth on monthly basis).

If anything, aside from the major trend outlined in the first set of bullet points above, the point on Confidence and Profitability is the second main conclusion from the longer-term data analysis, for it exposes the surreal nature of the Irish economy - economy distorted by extreme transfer pricing and tax optimisation activities of the MNCs.

Now, let's touch briefly on the main short-term observation from today's data release: the core drivers for each of the main sub-series:

• When it comes to Business Activity index, level support at 53.6 in February was provided by a broader base of sectors, with Technology, Media & Telecoms sector (TMTS) posting comparable expansion to Transport, Travel, Tourism & Leisure sector (TTTLS). This is similar to what was observed back in October 2011 and is an improvement on the trend that (at least over the last six months) have seen TMTS being the main and dominant driver of the index improvements.
• Business Activity Index for Expectations out 12 months ahead was dominated (as in every one of the previous 6 months) by TMTS, with Business Services Index coming in as the second upside driver (same as in January 2013).
• TMTS was the main driver for the third consecutive month behind growth in Incoming New Business, while Financial Services were the main driver over the last 4 months behind the growth in the Incoming New Export Business.
• In Employment generation, TMTS again outstripped all other sectors for the third consecutive month, which, of course, means we are only reinforcing the demographic misalignment emerging in the economy with main generation of new jobs taking place in sectors that are more reliant on importing skills from abroad.
• TMTS was the only sector in which profitability improved in February 2013 (same as in December 2012 and January 2013). In all other sectors, profitability was in decline for the third consecutive month. Why, you might ask? Interestingly, TMTS saw the sharpest countermovement in input/output prices, with input costs posting sharpest acceleration in February, and output costs posting the sharpest deterioration. In any normal economy that would mean shrinking, not expanding, profit margins. But in Ireland, of course, there is little normal about the TMTS sector dominated by the massive MNCs aggressively using their Irish activities for tax arbitrage from their European and even global operations.

Some interesting stuff, eh? You bet official 'analysis' of Irish PMIs is not talking about any of this...

5/2/2013: Services PMI v CSO Services Index... hmm...

In the previous post, I raised some questions about the real tangible quality of the PMI data for Services when it comes to reflecting upon the Irish economy. Here is a bit of more disturbing evidence. I plotted in the chart below the contemporaneous index of services sectors activity as measured by the CSO and the services PMI.

In short - there is no relationship. It is effectively zero. So either PMI does not accurately reflect services activity, or services activity index doesn't reflect it. Or more likely - both series have serious shortfalls. However, overall the question about PMI for services validity in providing an insight into the real economy is still open...

5/2/2013: Irish Services PMI for January 2013

The latest data from Services PMIs - released this am - is full of positive news. In this light, it is both hard and, perhaps, unjust to rain on the parade with detailed analysis of hypotheticals. But, alas, this is what needed for the dose of reality check.

Before we do, here are the straight forward numbers.

Overall headline Business Activity index rose to 56.8 in January 2013 from seasonally adjusted 55.8 in December 2012 - a strong level of activity that marks the highest index reading for any month since August 2007 when the index reached 57.0.

This is the good bit. And it gets even better when we consider 3mo MA to smooth out some of the monthly index volatility: current 3mo MA stands at 56.2, ahead of previous 3mo MA through October 2012 of 53.9. Year ago, 3mo MA was at contractionary 49.8 and in 2011 the same period 3mo MA was at 50.7 against 2010 3mo MA through January reading 46.5. In other words, we have solid increase in 3mo MA, which is more sustainable reading than monthly series.

12mo MA is at robust 53.0, implying that last 6 months have seen, on average, stronger activity in the sector (55.1) than February-July 2012 (50.9). Also good news.

Chart to illustrate:

Per chart above, Business Activity expansion was backed by New Business Index growth. New Business Index reading reached 56.6 in January, up on already strong reading of 56.4 in December. However, unlike overall activity, new business expansion was not as dramatic in historic terms, with January marking third fastest rate of expansion in 6 months. 3mo MA through January 2013 stood at 56.5 - faster than 54.5 3mo MA through October 2012. In 2012, same period 3mo MA was 49.9 and in 2011 it was 47.6, while in 2010 it was 46.8, which means that the last 3mo MA expansionary reading (and strong one at that) is the first expansionary reading in 4 years.

12mo MA for New Business Activity is now at 53.4, with last 6mo MA at 55.5 against first 6mo MA at 51.3, suggesting that New Business Activity is a major driver behind Overall Business Activity acceleration in the last 6 months.

Chart below shows snapshot of both indices over shorter period of time, allowing for better understanding of the underlying short term trend:

The close coincidence in series since November 2011 is indicative that sector activity is gaining momentum on foot of New Business Orders (as opposed to jobs inventories and backlogs) and trend acceleration since July 2012 also shows sustained momentum.

All of this is good news. And there is more. New Export Business index rose to 63.5 in January from 61.3 in December, marking the highest reading in series history with previous record of 63.3 reached in June 2006. 3mo MA through January 2013 is at 60.3, against previous 3mo MA of 55.5. This contrasts with 3mo MA through January 2012 at 52.4, 3mo MA through January 2011 of 53.1 and 3mo MA through January 2010 of 52.6.

This blistering pace of activity should, however, be treated with some concern. Now, take a look at the rates of expansion here, contrasted with rates of robust rises in Employment. Employment index rose to 56.5 in January from 53.4 in December. The Index posted above 50 readings in 5 months in a row and 3mo MA for the index is now at 54.6, up on previous 3mo MA of 51.3. Over the last 6 months, thus, employment in services sector have expanded rather rapidly.

Meanwhile, profitability in the sector continued to contract: Profitability Index (I compute my own for comparative analysis with Manufacturing, but let's stick to 'official' Profitability reading for now) remained well below 50, at 49.2, marking 62nd consecutive month of contracting profits in the Services sector.

Now, ask yourselves a simple question: 62 months of uninterrupted collapse in profits, plus over the same period 11 months of expanding employment, plus 21 months over the same period of rapidly growing exports, equals what? How can catastrophically less and less profitable business retain relatively robust employment levels and expand dramatically exports? Oh, well, the answer to this dilema is a simple, but unpleasant one - most of our services activity (and roughly speaking 90% of our services exports activity) is dominated by the tax-optimising MNCs. In other words, while the headline numbers are rosy, the underlying reality is probably less tangible to the Irish economy than we would like to believe. Employment growth in these MNCs-led sectors is primarily focused on importing skills (so no effect of reducing unemployment), while shrinking profitability in the Business Services sector and Transport, Travel, Tourism and Leisure sector (which led in profitability decline) means lower revenues for the Exchequer and lower indigenous employment.

One thing Irish Stuffbrokers issuing upbeat reports on PMIs basis are too lazy to check is the composition of what they are talking about at the aggregate levels. Here's a simple snapshot of employment increases over the last 6 months, reported in the PMIs:

Contrasted by 6mo data for profitability:

And contrasted again by New Export Business figures:

It turns out, on average, over 6 months, the ENTIRE range of PMI-covered services subsectors have managed to post increases in employment, and even mor robust rises in New exports, with largest rises, by far in the MNCs-dominated ICT services and Financial Services. But Business Services - the ones that are suffering from deep cuts in profits - are also posting rises in exports and employment. This is either bonkers data collection, or a severe selection bias toward MNCs with tax optimisation, not real activity on their minds.

You can see that new exports are acting to grow current employment, while shrinking profitability seemingly has no effect on current employment (current points marked in red) here:

More on profitability conditions and employment in both Manufacturing and Services PMIs in subsequent posts, but overall, the data is very positive. It is just worth asking a question just how much relevant is this data to real economic activity?