How well do we actually know what’s going on in the economy?

How well do we actually know what’s going on in the economy?

Often, the picture relies on a number of key metrics: The unemployment rate, gross domestic product, the consumer price index, and perhaps the balance of trade and some sentiment measures such as business confidence surveys.

But while these data can be tracked over time, they do not show the full picture.

Otago University economist Murat Ungor said the data answered narrower questions than people often assumed.

“Stats NZ’s headline numbers are built to measure specific things consistently over time. The problem is when we ask them to tell us how people are doing.

“Take unemployment. The headline rate only counts people who are actively looking for work and available to start. It misses people who want more hours, or who have given up looking.”

This is one of the reasons that unemployment can increase as the economy improves, because people who think they might have a chance of finding work make themselves available again.

“Stats NZ also publishes an underutilisation rate that captures some of this, and it often tells a more useful story about slack in the labour market,” Ungor said.

He said, along similar lines, gross domestic product (GDP) would show the total value of output but not how it was shared or how it felt.

“When population growth is strong, GDP per person can tell a quite different story from total GDP, which matters a lot in New Zealand given swings in migration.”

The consumer price index (CPI) tracks the movement in a basket of goods, but that will rarely be a household’s experience, unless they buy all the items in the basket at the weightings used by Stats NZ.

“The official CPI describes an average basket, but households with different spending patterns, such as renters, mortgage holders and retirees, face different cost pressures,” Ungor said.

“Stats NZ already publishes living-costs indexes by household type. It would be good to see them get more attention in public debate.”

The most recent household living costs data showed an overall increase of 3 percent in the June quarter, compared to 3.7 percent for CPI.

Ungor said, to get a fuller picture, the data could be viewed alongside distributional data, the household-level cost measures, wellbeing indicators such as Treasury’s Living Standards Framework and Stats NZ’s own wellbeing indicators, as well as international comparisons.

“No single number will tell us how the economy is doing for people. A small set of well-chosen indicators, read together, gets much closer.”

Matt Roskruge, an economist at Massey University, agreed the data had limitations.

“GDP is useful for measuring economic activity, but it doesn’t tell us how the benefits are distributed or whether people feel better off. Likewise, unemployment only tells part of the labour market story.

“In NZ, Treasury’s Living Standards Framework and our child poverty reporting are examples of attempts to get a broader picture. For households, things like income after housing costs, being able to afford the essentials, and job security may be closer to how they experience the economy.”

He said there was no one perfect measure that would give the full picture.

“We need a small set that tells us different things, measured consistently so we can see patterns over time. We also need to look at who is doing well and who is struggling, because an improving national average can hide quite different experiences … there is room to improve how we measure things, but also how we use the data we already have and how clear we are about what it isn’t telling us.”

ANZ chief economist Sharon Zollner said transaction data was becoming more useful to gauge activity, but survey data was getting much worse.

“Everyone is now so cautious about spam and scams that they are very hard to get hold of and reluctant to participate. And young people don’t talk to anyone on the phone except their parents, and that’s only if their parents call them. Multiple times. But although the economics data isn’t perfect, and GDP is pretty poor as a measure of the average quality of life, I would say that in general the data is correlated with what we really care about, and well worth collecting.

“If there was an obvious better way to be measuring things we would be doing it already.”

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