Guest Editorial: When the data are not in sync

SAMIRUL ARIFF B OTHMAN

A diffusion index is a statistical measure that tracks the spread of a particular economic indicator across different sectors of the economy. It serves as a lens through which we can see the interconnectedness and interdependence of different aspects of the economy. This can provide valuable insights into the overall health of the economy and help identify areas of strength or weakness.

One of the key benefits of using a diffusion index is that it can help to identify trends and patterns in economic activity. By looking at the spread of a particular indicator across different sectors, we can gain a more comprehensive understanding of the economy and make more informed decisions.

Diffusion indexes are used to predict future economic conditions, much like the way a weather vane indicates the direction of the wind. Changes in the spread of an indicator can often signal shifts in the overall direction of the economy, and allow us to anticipate future trends.

For example, a diffusion index could be used to track the percentage of industries that are expanding or contracting, which can provide insight into the overall direction of the economy. To generate a diffusion index, one first needs to identify the economic indicator to be tracked, for example a measure of sentiment, such as consumer confidence or business confidence. This is followed by conducting a survey of a representative sample to gather data. After performing calculations, the resulting value of diffusion index can be used to gauge the situation. A value above 50 indicates that more firms or individuals reported positive or expanding conditions, while a value below 50 indicates that more reported negative or contracting conditions.

By tracking the index over time, it is possible to identify trends in economic activity. For example, if a diffusion index for a particular sector has been consistently above 50 for several months, it indicates that the sector is in a period of expansion and growth. The reverse is true, if the index has been consistently below 50, it indicate that the sector is in a period of contraction and decline.

While the rate of change of the index identifies trends. A rapidly increasing index indicates a stronger expansion than a slowly increasing index and vice versa. Similarly, a rapidly decreasing index indicates a stronger contraction than a slowly decreasing index.

It's worth noting that diffusion indexes are often used in conjunction with other economic indicators, to provide a more comprehensive picture of the economy's overall health.

Two examples of diffusion indexes used in business cycles are the Purchasing Managers' Index (PMI) and the Tankan survey.

The Purchasing Managers' Index (PMI) is an index that is used to track the manufacturing sector. The PMI is based on a survey of purchasing managers, who are asked to rate the current and expected conditions of their respective industries. The PMI is calculated as a composite index, with values above 50 indicating expansion, and values below 50 indicating contraction.

The Tankan survey is conducted by the Bank of Japan to track the health of the Japanese economy. It is based on a survey of Japanese companies,

Both the PMI and Tankan surveys are closely watched as they give an early indication of economic trends and help in forecasting economic performance.

In Malaysia, 2 Diffusion Indices released by a particular outfit are widely followed. One tracks business confidence and the other consumer conditions. However statistical analysis reveal that both indices do not move in tandem with actual economic data and in fact they buck the trend at times. It comes as no surprise that even the Monetary Authority of Singapore (MAS) stopped following this particular set of indices.

While there were calls for these metrics to be discontinued, a trenchant economist persisted. With remarkable tenacity, these indices were incorporated as input for the now defunct National Recovery Council (NRC). We now know that the NRC has not published a single report. Can we find their recommendations to the government in the public domain? Regarding the pandemic -how big were business losses and the impact to the GDP? What about the cost to the informal economy and social costs?

It is a case where these indices do not reflect the actual situation on the ground and are not in sync with the economy. The situation is akin to a 'Chicken without Head', a situation that is disorganised, confusing and lacking direction, like a chicken that has lots its head and is running around aimlessly. In the final analysis the taxpayers have a right to know what happened.

Originally published in NST 27th January 2023

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Samirul Ariff Othman is a widely quoted independent analyst. He was previously attached to a leading local think tank. He completed his graduate studies at Macquarie University, Australia. The opinions in this article are his own.

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