What's going on?
Fresh survey data out on Wednesday showed activity in the UK and eurozone economies rose this month, but things still aren’t moving nearly as quickly as economists had hoped.
What does this mean?
These monthly surveys – which ask business managers across manufacturing and services industries how busy they’ve been compared to the month before – are combined into a single statistic: higher than 50 signals an economic expansion, lower than 50 signals a contraction. And while the UK and eurozone’s activity came in above that mark – though just barely in the latter’s case – it still fell short of economists’ predictions. That certainly can’t be pinned on the regions’ manufacturing industries, which performed better than expected: it’s all on services – think lawyers, accountants, and hospitality workers – whose activity was weaker than forecast.
Why should I care?
The bigger picture: Time for a new approach.
These surveys focus on a single month, but investment bank Goldman Sachs reckons they’re actually a better way to gauge economic activity across a few months. That’s partly because the surveys only show the number of firms that report higher, lower, and unchanged activity, while ignoring the extent of the changes themselves. Goldman thinks the issue is easily solved: the bank said a moving average that puts more weight on recent data would better reflect the reality behind the surveys.
For markets: Don’t believe the numbers.
Based on an appropriately weighted moving average, Goldman’s worked out that the eurozone’s 50.9 survey reading in September doesn’t actually correspond with the slight pickup in growth the figure suggests. In fact, the eurozone economy probably shrank this month relative to August. Either way, over-50 readings are pretty normal after sharp downturns, and it could take more than that to convince pessimistic investors of a steady recovery – namely consistent improvements in survey data between now and when third-quarter economic growth data gets published next month.