British business leaders are worse at reading the economy going into a recession than consumers. But they pick up on recoveries much more quickly.
That’s my conclusion from playing with a fascinating interactive chart available at the OECD website. It plots consumer and business confidence against industrial output and a composite of economic indicators.
It’s brilliant. Set the bar to a start time (the business confidence metric begins in about 1986, so that’s as good a point as any) and the application plots confidence and output against a quadrant month-on-month.
- When confidence/output are high and rising, we have expansion.
- When they’re high and falling, contraction.
- If it’s low and falling, we have a slowdown.
- And when its low and rising, a recovery.
The path of the 1991 recession is a great example of my argument. Between 1987 and 1989, consumers are already getting doomish. They can tell something’s not right. Eventually, the mood permeates the business confidence numbers in early 1991. They get ultra-nervous about the economy — although by that time, consumers are seeing green shoots. Only in August 1991 does business confidence turn the corner. But throughout that period, businesses over-reacts, while consumer confidence more closely matches the actual changes in the economy.
Then the consumers have a crisis of confidence through 1992 as the economy remains in the doldrums. (Bear in mind, the really big falls in house prices happened then, too.) Even when economic indicators are in “expansion” territory in 1994, consumers have a recession mindset.
Business then overshoots actual output — which is heading down again, weighed by those negative consumer sentiments — and the decisive late 1990s recovery only beds in after a period of positivity from consumers starting in about 1996. Business has had the recovery nailed for months by then.
Business confirms its status as a poor predictor of recessions in 1998 as confidence plummets, while real indicators and consumers stay in reasonably positive territory. It happens again in the dot-com crash between 2001 and 2003. Then, in 2008, consumer confidence is much quicker to pick up on recession - although business is also getting wise and tracks them into negative territory more closely. (Overall, business leaders come off as more skittish and reactionary that their customers, funnily enough.)
Have a play yourself - you can choose pretty much any OECD country to analyse — and compare countries against each other as well as choose the time period(Or check out the “New York Times” analysis of US recessions). I wouldn’t use it as a hard and fast investment decision-making tool. But I would say it makes those oft-publicised confidence surveys (both consumer and business — there are loads from organisations like KPMG and the British Chambers of Commerce) just that little bit more meaningful.
(Pic: aussiegall cc2.0)
