Are businesspeople really as happy as confidence surveys suggest?
Are businesspeople really as happy as confidence surveys suggest?
THREE KEY FACTS:
The ANZ Business Outlook survey for August shows confidence at its highest level in a decade.
The Reserve Bank forecasts that New Zealand is currently in recession.
The Reserve Bank cut the Official Cash Rate in August.
Liam Dann is business editor-at-large for the New Zealand Herald. He is a senior writer and columnist, and also presents and produces videos and podcasts. He joined the Herald in 2003.
OPINION
“I’ve been down so goddamn long, it looks like up to me” – Jim Morrison
The dramatic rebound raises some big questions about sentiment: How do we measure it? How meaningful is it? Can it drive real economic results? Performance? And is it politically biased?
Ok, we’ve had one Official Cash Rate cut. But the economy is in recession, unemployment is still rising along with numbers of business failures. What gives?
News about the ANZ Business Outlook results certainly provoked a strong reaction. Readers wrote to express their disbelief.
Reader Glenn wanted to tell me I was “still penning utter crap”. It is nice that Glenn is “still” reading, I thought.
The issue I have with that comment isn’t that Glenn thinks my writing is crap. When I write opinion columns and commentary, I expect negative and positive reactions – often extreme ones. That’s all part of the fun of news commentary.
But my story about business confidence wasn’t opinion. It was a straight news report of ANZ’s survey results.
Other readers managed to grasp this and so directed their scorn towards ANZ, the survey or, in some cases, the business owners themselves.
It all highlighted to me that, after years of writing about them, these sentiment surveys are not well understood... still.
The first thing I’d say is, the survey results are factual. Even though the survey measures subjective opinions, those opinions are real. And collectively they provide a robust poll.
ANZ is the largest bank in New Zealand so it has a lot of business customers to ask about their expectations. But it is not exclusive to ANZ customers – others can sign up.
It polls about 1500 firms. Technically, there are about 700,000 registered businesses in New Zealand but many of those are likely inactive shell companies.
So, regardless of the exact proportion the survey catches, it is a large one compared to political polls. They’ll typically survey 1000 people to get a snapshot of what four million New Zealand voters are thinking.
Ironically, many of us, myself included, put a lot of weight on anecdotal evidence based on much smaller numbers. We start with how we’re doing ourselves, we talk to Uber drivers, bartenders and hairdressers. We count the for-sale signs in the neighbourhood and we listen to small-business-owning friends and family.
People are forever telling economists they need to get out in the real world, forgetting that when they aren’t writing up reports they’re usually travelling around the country talking to business groups.
Anecdotal evidence gives us a gut feeling. It can be useful. But it can also skew things wildly. I tend to take it most seriously when I see it lining up with the economic data.
Two more key things to understand about business confidence surveys are that they are forward-looking and binary. Respondents are asked whether things are going to better or worse in 12 months’ time (all right, almost binary, they can also choose to say things will stay the same).
On that basis, news of a big rise in optimists isn’t so surprising. It’s not a barometer of economic and business conditions right now.
If anything, last week’s result tells us that, right now, things are about as bad as they are going to get. They suck so badly they can only get better.
To paraphrase Jim Morrison and The Doors: we’ve been down so goddamn long, it looks like up from here.
Jim Morrison of The Doors.
Some people have noted a political bias in these sentiment surveys. It’s probably true that business owners skew to the centre-right politically.
The NZ Institute of Economic Research – which has its Quarterly Survey of Business Opinion – has done research which shows that, historically, confidence levels are lower when Labour governments are in power.
Perhaps that’s just a reminder that we shouldn’t put much weight on these surveys for political purposes.
It doesn’t change the facts around business sentiment. It’s also relatively easy to account for any bias.
It is the trend that we’re looking for.
The interesting bit last week was the size of the bounce from low levels earlier in the year – when the same coalition was in power.
For all that, economists mostly don’t put too much weight on topline confidence.
But they take expectations that business owners have for their own firms more seriously. There are more nuanced questions in the surveys that they take more seriously still.
Historically, the hiring intentions recorded in the confidence surveys have correlated very well with actual employment data. Investment intentions have correlated well with investment and own activity has correlated with GDP.
Perhaps most relevant in the past few years has been what firms report about their pricing expectations. If a large proportion expect their costs to rise or are planning to put prices up then that has implications for inflation.
The businesspeople being surveyed are all actors in the economy and their actions are guided by how they are feeling.
The same can be said of consumer confidence surveys. When consumers feel upbeat we are more likely to spend and the economy is likely to get a boost.
But business owners are closer to the coal face. They see real-time sales data, and cash flow rises and falls more rapidly than it does for those on salaries. They also hire and fire.
So economists – including the Reserve Bank – pay attention to business sentiment. It shouldn’t be looked at in isolation. Unexpected trends or black swan events can make fools of us all.
But if you are worried about how bad the economy is right now there is some real confidence to be found in the renewed optimism of the business community.
Liam Dann is business editor-at-large for the New Zealand Herald. He is a senior writer and columnist, and also presents and produces videos and podcasts. He joined the Herald in 2003. To sign up to his weekly newsletter, click on your user profile at nzherald.co.nz and select “My newsletters”. For a step-by-step guide, click here. If you have a burning question about the quirks or intricacies of economics send it to liam.dann@nzherald.co.nz or leave a message in the comments section.
