For some economists, such as Prescott (1996), the renewed interest in growth over the last 20 years stems from their belief that business cycle fluctuations ”˜are not costly to society’ and that it is more important for economists to worry about ”˜increasing the rate of increase in economy-wide productivity and not smoothing business fluctuations’. This position has been publicly expressed earlier by Lucas in May 1985 when delivering his Yrjo Jahnsson lectures. There he argued that post-1945 economic stability had been a relatively ”˜minor problem’ especially in comparison ”˜to the costs of modestly reduced rates of growth’ (Lucas, 1987). More recently, Lucas (2003) has repeated this message using US performance over the last 50 years as a benchmark. Lucas argued that ”˜the potential for welfare gains from better long-run, supply-side policies exceeds by far the potential from further improvements in short-run demand management’. [Brian Snowdon. Howard R. Vane. Page 33. Modern Macroeconomics: Its Origin, Development and Current State. 2005]
Tag: business cycle
The Department of Statistics releases the Industrial Production Index today:
|
Sectors |
Index October 2009 |
% Changes |
% Changes |
| IPI |
106.5 |
0.7 |
5.7 |
| Mining index |
96.4 |
-2.7 |
2.3 |
| Manufacturing index |
109.9 |
1.0 |
7.0 |
| Electricity index |
123.1 |
13.4 |
7.7 |
The important column is the year-on-year one.
The Industrial Production Index (IPI) in October 2009 posted a marginal growth of 0.7% year-on-year for the first time since September 2008. Meanwhile, the IPI in September 2009 was revised negative 6.0% year-on-year. The increase in October 2009 was due to the increases in the two indices: Manufacturing (1.0%) and Electricity (13.4%). However, the index of Mining posted a decrease of 2.7%.
Month-on-month, the IPI increased 5.7%. The cumulative index for the period of January-October 2009 declined 9.7% as against the same period in 2008. [Index of Industrial Production Malaysia October 2009. Department of Statistics of Malaysia. December 10 2009]
The manufacturing sector may finally be out of the woods. This is dependent on any revision to the figure that may occur next month however.
Notwithstanding the revision, given the centrality of the manufacturing sector to Malaysian economy, this improvement is hugely important. It provides a strong pragmatic, instead of ideological, case against the need for a third stimulus package.
The electricity is particularly indicative of possible future trend. Electricity can be argued as a leading indicator because one, it is a crucial input across a great many sectors, two, there is likely a lag between electricity consumption and completion of a goods and three, because it is an lagging input with respect to goods completion, any increase in production will be preceded by increase in electricity consumption, holding all else constant. That is why I was excited as early as July this year, as far as the IPI is concerned, when year-on-year electricity consumption first grew after it fell for an extended period.
What I would like answering is this: is the cause of the improvement in the IPI due mostly to foreign demand for domestic goods or domestic demand for domestic goods?
If it is the former, then it is likely that economic recovery, at least as far as manufacturing is concerned, has been driven largely by external demand, not Malaysian stimulus spending that is aimed at increasing domestic demand. In other words, it answer the effectiveness of the two stimulus spending. Given the huge size of external demand for domestic goods compared to domestic demand for domestic good, you know where my money is.
p/s — Elanor commented and brought up a factor that I regretfully missed. Accounting for that factor, it is becomes tenuous to claim that the increase in October is due to non-seasonal factor and therefore, due to underlying trend. This is so because year-on-year fails to remove seasonal effect as it typically does.
Nevertheless, being a stubborn person that I am, there is a good reason to think that the economy is improving, especially since the IPI has been improving (okay, performing less bad rather than improving) since January this year.
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[2078] Of a good sign?
I should really be at University Library right now but I just could not resist blogging about this.
The latest Industrial Production Index produced by the Department of Statistics has it that electricity output increased and more importantly, it increased based on year-on-year basis in July 2009. This means, electricity output has been increasing on year-on-year basis for two consecutive months. It first registered positive year-on-year growth in June 2009 after months of output reduction. This is another blow to government spending-based stimulus advocates because it indicates that the economy is recovering well before the effect of stimulus spending comes into play.
Electricity output, or rather consumption (but really, the two should be almost the same) has been argued as a good indicator of economic performance. See this. The following table is taken from the Department of Statistics.
|
Sectors |
Index July 2009 |
% Changes Year-on-Year |
% Changes Month-on-Month |
| IPI |
104.8 |
-8.4 |
7.1 |
| Mining index |
99.6 |
-1.9 |
10.0 |
| Manufacturing index |
106.2 |
-12.0 |
6.2 |
| Electricity index |
118.7 |
3.1 |
3.5 |
I will blog about this later. For now, I need to make a dash to the University, which is, like, 100 meters away. Oh, so far away!
Heh. I love my life.
I am holding the view that the RM67 billion government spending-based fiscal stimulus as announced will not be helpful. The market will show a swing independently of spending.
The swing is already happening in spite the fact that government spending has been insignificant so far. Furthermore, the magnitude of government spending is pale in comparison to the drop of external demand. If there is to be any recovery, it will be driven by external demand, just as the recession has been caused by external demand. All this makes the government spending-based stimulus irrelevant.
Due to temporal issue between the effectiveness of the spending and market cycle, when proper recovery takes places, private firms will suffer from crowding out effect since the stimulus is financed through local sources. Interest will have to go up higher when compared to a situation where there the size of government spending is absent.
Well, I might be wrong. My position is too kind. There is a piece yesterday that may indicate that the stimulus is hurting recovery:
GEORGE TOWN: Penang’s electronics industry is facing a shortage of production workers after orders started to pick up early last month, according to a job outsourcing company.
The problem is compounded by local workers who prefer to enrol instead in the government’s retraining scheme where they are paid more, said Inter Resources Consulting Global Search (M) Sdn Bhd managing director Michael Heah.
He said locals were not keen to work long hours in factories for RM500 to RM600 a month, preferring the retraining scheme for unemployed graduates and retrenched workers where they were taught new skills and received a monthly allowance of between RM500 and RM800. [Penang electronics firms unable to cope with demand. The Star. July 2 2009]
Firms are actually competing — gasp! — with the stimulus package for labor, making them incapable of meeting demand in the short run.
How is that for a stimulus?
Worse:
Heah said the electronics industry started to recover last month with the semiconductor and consumer electronics sector stepping up their recruitment drive to get more locals to fill vacancies.
”To make matters worse, the intake of foreign workers has been frozen. We appeal to the Government to lift the freeze in the sector,” he said. [Penang electronics firms unable to cope with demand. The Star. July 2 2009]
Unless productive firms can find individuals that are not enrolled in the retraining program, they will need to raise wages.
I am a fan of raising wages only to accommodate inflation, to compensate improvement in productive for the labor factor of production or competition from firms for labor.
I see none of those here. That potential raise of wages may be caused by distortion created by the government, more than anything else.
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[2008] Of it is a race, then
The federal government has set a timeline:
IPOH, June 13 (Bernama) — The impact of the first and second stimulus packages totalling RM67 billion announced by the government, can only be seen in the third and fourth quarters of this year, said Second Finance Minister Datuk Seri Ahmad Husni Mohamad Hanadzlah.
He said the ministries involved in the implementation have offered 43,681 contracts for RM6.95 billion in the first stimulus package and 708,011 contracts worth RM10 billion for the second.
“A total of RM15 billion is fiscal expenditure in the second stimulus package.But only RM10 billion is being utilised for this year with the remainder to be spent in 2010. [Impact Of Stimulus Package To Be Seen Third And Fourth Quarters Of This Year. Bernama. June 13 2009]
I will be watching the external demand side and I will bet that recovery will be fueled by improved external more than anything else.
Already at the moment, there are signs that the market is ahead of the intended effect of additional government spending amounting to RM21 billion. Also, nevermind that the fiscal stimuli have already failed to meet earlier set deadline.