It started with a QES: The Manchester Index™
Chamber Chief Economist, Dr John Ashcroft, explains the Manchester Index and its importance in 'now-casting' the economy:
I have always been a great fan of the Chamber's Quarterly Economic Survey. Firstly, it is a big survey which is comprehensive, authoritative and timely. We poll approximately 5,000 members every quarter with over thirty questions on the state of business. Secondly, it has pedigree with long run data back to 1995. Thirdly, it has authority; as part of the national British Chambers of Commerce (BCC) survey, it is one of the most authoritative business surveys. The results of the BCC national survey are closely watched by both HM Treasury and the Bank of England’s Monetary Policy Committee. The great advantage of our Greater Manchester survey is that it is immediate. The GM QES is the first to be published in each quarter. Early results are available by the end of each three-month period in the calendar year, prior to the preliminary estimate of growth from the Office for National Statistics (ONS).
The QES is big, comprehensive, authoritative and timely …
As we mine the data, we find the results have a high correlation with overall trends in the economy. Manchester does not lag the national picture, but is a strong co-incident indicator. We can use the survey data to monitor the performance of the economy and predict developments in the official data. The survey has a high correlation with regional and national trends. Using the Greater Manchester results we can predict with great accuracy the overall national trends in growth and employment.
The Manchester Index™…
Mining the QES data, we developed the Manchester Index™, a succinct summary index which pulls together key information on demand and delivery within the manufacturing, construction and service sector. The Manchester Index™ is an early indicator of trends in both the Manchester and the UK economy and is an alias for the GM QES Composite Leading Indicator®, which has a high correlation with the UK National GDP data.
The Manchester Investment Index™
Within the data we can also use trends in capacity and investment intentions to model the path of investment within the UK economy. The collapse in investment spending from 17% of GDP in 2007 to just 14% in 2013 baffled policy makers. In particular, it was assumed a recovery in investment would occur given the low level of interest rates. The low cost of capital would lead to an increase in investment spending; so much for the theory.
Our Quarterly Economic Survey reveals the reality. Businesses react to confidence in demand and profits over the medium term. As the future path of the economy clears, we use capacity, (lagged by four quarters) and investment intentions (lagged by two quarters) to generate our investment model. Cost of capital is a relatively small component in the pay back calculation. Demand is the principal component in the pay back equation.
Our Manchester Index™ business investment tracker utilises data from capacity and investment intentions to forecast investment in the UK economy. The survey results provide great confidence to our forecasts of growth in investment spending in 2014 and 2015.
For those worried about future productivity, our capital stock model suggests there has been no significant loss to output over the last four years. We expect a recovery to pre-recession (capital stock) levels over the next two years. Policy makers tend to overlook the fact that 70% of investment spending is linked to commercial real estate and the housing market. The recovery in commercial real estate is still some way off.
In summary …
The Manchester Index™ is an early indicator of trends in both the Manchester and the UK economy, and, using the Manchester Index we are in a great position to 'now-cast' the UK economy and get a pretty good steer on employment and investment in the process.