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OCT 13

Sentiment means what?

There has been a lot of recent talk of the New Zealand economy strengthening, backed up by apparent improvements in data, in particular the PMI and PSI. While it is clear that some general improvements have been felt, the extent and areas of improvement can be questioned.

Can we have confidence in measures based on sentiment? What should sentimental measures mean to us?

While they can be a useful indication, we should not take them as a true measure of our economic health, particularly for the manufacturing sector; which is so diverse. Situations which may be supporting growth and improved profits for some might well be having adverse effect on others.

This is also very apparent in the difference between those selling only into the domestic economy and those heavily weighted to export or strong competition from imports.

Sentiment measures can be strongly influenced by confirmation bias, we tend to find what we look for. The hope that things are getting better can have an effect on sentiment measures, where indications and trends based on actual sales and performance data are harder to skew with wishful thinking.

Of late much of the positive data in manufacturing has been fuelled by the construction sector, and the Christchurch rebuild. The rebuild will be with us for a while but the activity is transient and a housing market boom brings risks of bust and excessive debt growth. Care is needed in developing a realistic view of what is happening; too much hype without substance has a downside.

Around the world sentiment seems to be improving, substantive or otherwise this has an impact. If wishful thinking expands debt to further build capacity and then sales don’t happen we all have a problem. Recently, data out of the U.S and Europe has been more positive, although the Federal Reserve have been on again off again on tapering their bond buying, all this contributes to the mad volatility of the New Zealand dollar and the sentiment of our exporters. An accurate representation of what might be happening in general really does matter and the basis of any commentary should be checked for skew susceptibility.

The NZMEA Survey of Business Conditions combines a collection of measures, showing actual sales results, staff numbers and a range of sentiment indexes, it gives us a grounded and often conflicting view, but in the end only the sales data matters. Reporting actual sales data gives a clear, stark base line. We can add commentary around the rest; how people are feeling, threats and opportunities but the foundations are the sales numbers. The final components in the mix are our conversations with manufacturers and exporters around the country, adding more colour and anecdote.

Even in our own survey we can see the difference that can appear between actual sales data, and sentiment measures. Looking at our most recent survey we can see sales both domestic and export are down year on year.

While the actual sales data showed this negative result, our sentiment measures showed confidence improving, our performance index was down, but the forecast index was up on last month.

To get the most realistic view we need to look at both sentiment and actual measures of sales data on the month, plus the trends of both over time, sentiment alone never tells the full story.

Although we are seeing some positive sentiment, our survey is showing sales falling, this is a cause for concern irrespective of the “confidence” feelings reported elsewhere. If a sentiment measure is all you have then that is all you can report but it is not the full picture. It is best to take this into account and take care not to place much confidence in sentimental measures alone.

tags: sentiment, confidence, pmi, economy, federal reserve, sales
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