Half a story doesn’t describe the whole reality

Ben D. Kritz

Ben D. Kritz

OVER the weekend, Moody’s Analytics, the research arm of the ratings firm, said in a report Philippine manufacturing output in January ‘likely’ rose by 5.3 percent year-on-year. If true, that would represent a modest improvement over the 4.9 percent growth rate in December.


The intended message is that Philippine factories are busy manufacturing yet another indicator that the overall economy is in good shape, and getting better. Good news, right? Well, not so fast.

What Moody’s Analytics reported was its estimate of factory output by volume, formally known as the Volume of Production Index (VoPI), which is usually the same piece of data highlighted in the monthly report released by the Philippine Statistics Authority (the January figures will be released this Thursday). VoPI tells us a couple of important things: Whether or not production capacity is increasing, either through new production being added or existing factories utilizing more of their capacity, and indirectly, the VoPI is a qualitative indicator of the country’s employment environment—if factory volume is increasing, more people are working.

The national economy is not, however, measured in the number of spark plug wires or sachets of toothpaste produced but in terms of pesos—actual money—and so the VoPI is rather meaningless without the indicator that accompanies it, the Value of Production Index (VaPI). This is released at the same time as the VoPI, but in recent months has been downplayed, if not ignored entirely, by the corresponding press releases, because in contrast to the volume indicator, manufacturing value has been dropping; in December 2015, it retracted by 2.6 percent year-on-year. It had a mild boost in November, picking up 1.0 percent, but fell in nine of the 10 months prior to that, going back to January 2015.

Having gone over this lesson almost exactly a year ago, I’ll provide just a brief refresher of it here. Stable or increasing manufacturing volume coupled with decreasing value is not a good combination, because it indicates prices are falling. Manufacturers have to produce more in order to maintain their revenues, which means their margins are dropping, and that ultimately will result in lower investment for business expansion or new businesses.

Value increasing along with volume is obviously a sign of better circumstances, but it depends on the degree of difference between the two. If value increases at a rate similar to or higher than the increase in volume, that is excellent news, an unequivocal sign that the economy is growing. If value is increasing but at a rate slower than the increase in volume, that means the problem of falling prices still exists, but is being ameliorated somewhat by value gains in some areas. Obviously, there is no good news at all in a situation in which both indicators are declining.

Of course, we will have to wait until Thursday to find out what the latest data indicates, but my fearless forecast, since Moody’s Analytics chose to tell only half a story and ignored the value component completely, is that manufacturing value will have again declined, probably by a similar amount in January as in December, somewhere between 2.4 and 3.0 percent. Depending on what February’s data reveals, I might even go so far as to say we are seeing signs of the beginning of a deflationary cycle, given the trend of the consumer price index (which has gone from 1.5 percent to 0.9 percent between December and February), and perhaps a wider slowdown in the economy, when things like the troubling lack of export performance are taken into account.

Obviously, that is quite a different story than the one Moody’s Analytics tried to tell, and there is some precedent for viewing their apparently aping of the self-serving, half-honest manner in which the government discloses economic data with a high degree of skepticism; when it happened last year, the VaPI promptly tanked, shrinking by an average of 6.4 percent for the next seven months, and helping the overall economy to end the year with a growth rate that was rather less than the government and most analysts were expecting or hoping for.

The reasons why the government itself would want to downplay or preferably avoid bad news altogether are understandable, but the reasons why a supposedly objective outside observer like Moody’s Analytics would want to do so are not so clear. A cynical viewpoint might be that the ratings agency’s business—a ratings review for a country not on the list of globally important economies the agencies assess as a public service averages several hundred thousand dollars—might tend to make its conclusions more customer-friendly than empirical. But I’m not a cynic, so I won’t say that.



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