No Free Lunch

Making sense of economic data

/ 05:10 AM December 19, 2017

One of the key messages I impart to my students is that I don’t want them to just be looking for jobs after graduation; I want them to be creating jobs. To do so requires more than just knowledge of principles of running a business, but also a minimum understanding of economics. These are not the same thing. What’s good for a specific business will not always be good for the economy as a whole, and vice versa.

Indeed, a good economist looks well beyond the interests of business in general. This is why the head of the National Economic and Development Authority (Neda) is quite unlike the other Cabinet economic managers. The secretary of trade and industry has the business sector as his primary constituents, just as the Bangko Sentral governor and the secretary of finance have the financial sector, the secretary of labor and employment has the workers, the secretary of agriculture has the farmers, and so on. But the Neda chief has no such primary constituency; all Filipinos comprise his constituency. No industry or sector is supposed to receive special attention from him over others.


In keeping track of the entire economy’s welfare, the basic indicators to watch are the three things that impact directly on the lives of ordinary citizens: presyo (prices), trabaho (jobs), and kita (income), or P-T-K. I’ve long called it the PiTiK test. A rapid rise in prices is a problem, for two reasons. First, it raises costs of production, which firms may not always be able to fully recover by raising their own prices, particularly if there’s ample competition (which is good for the economy, but is not welcomed by individual firms). Second, it slows down consumer spending, making it even more difficult for businesses to sell their products and maintain profitability. Similarly, high and rising rates of unemployment directly translate to rising poverty, which in turn means less ability of people to buy the products of business in general. Higher GDP growth benefits all businesses if it means purchasing power is growing among all people in general. One has to look beyond the aggregate figure, then, and see whether growth is spread broadly across the economy, or if only few industries (e.g., banks,
real estate, business process outsourcing) are driving up the overall growth rate.

Beyond PiTiK, a number of other economic indicators bear watching. Interest rates, indicated by average bank lending rates and 91-day Treasury bill rates, tell a business how costly it is to borrow funds to finance investments and working capital. Consumers are directly affected, too. The higher the rates, the slower will be the sales of consumer durables like cars and appliances, which are mostly bought on financing terms.


The size of the government’s fiscal deficit and the balance of payments (i.e., foreign exchange inflows less outflows) are barometers of the stability of the overall economy. Excessively large deficits could signal impending economic slowdown, or even collapse. The foreign exchange rate affects business and consumer costs, as a depreciating peso makes imported inputs (especially fuels) and imported consumer goods more costly. But a weaker currency also benefits dollar earners such as exporters and overseas Filipino workers. Hence, it is more of stability than the level of the foreign exchange rate itself that matters.

As for stock market performance, this is merely an indicator of investor confidence in the economy, and not necessarily of the economy’s actual health. In particular, short-term movements should not be seen as a measure of the economy’s strength or weakness, as such movements can result merely from speculative profit-seeking forces. Furthermore, confidence in the economy—or lack of it—can prove to be misplaced, as has often happened
before, both here and abroad.

In the end, no one should be a slave to the numbers. In business, success is often built as much on intuition and risk-taking as on science. After all, the economic numbers ultimately arise from the sum total of actions of individual businesses and of households, along with the government’s policies and measures that influence those actions.

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TAGS: Cielito F. Habito, economic data, NEDA, No Free Lunch
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