As every small-business person knows, the econocrats who think they
manage the economy sit in their offices without ever meeting real
people. Instead, they pore over figures the Bureau of Statistics bods
dream up without ever leaving their desks.
That last bit has always
been wrong. Small business is run by people who think their sales this
week equal the state of the national economy. If the official figures
don't line up with their experience, some bureaucrat must be lying.
The
first bit - that the macro managers look at stats without ever talking
to business people - used to be true, but hasn't been since some time
after the severe recession of the early 1990s.
That was when
Treasury (and yours truly) was supremely confident the economy would
have a "soft landing". For once, people who knew no economics but had
heard the squeals coming from business were right and the supposed
experts were wrong.
The econocrats' disdain for "anecdotal
evidence" had led them badly astray. They learnt the obvious lesson: as
well as studying the stats, they needed to keep their ears to the
ground.
But what even many well-versed observers probably don't
realise is just how much effort the Reserve Bank puts into its
consultations with business and how seriously it takes the results. The
workings of its "business liaison program" are described in an article
in the Reserve's latest quarterly Bulletin.
The program was put on
a highly systematic basis in 2001, so as to lift it above the level of
anecdote. Specialised officers talk to up to 100 businesses a month. You
try to speak to a range of businesses (or, failing that, industry
associations) in each of the economy's industries. You speak to the same
people each time, asking the same questions and seeking quantification
where possible.
You stay conscious of the gaps in your industry
coverage. Ensuring you speak to businesses across the nation means
"liaison" is the main role of the Reserve's state branches. Ideally,
this should alert you to differences between the state economies.
Some
industries are dominated by few big companies, making them easier to
cover. But others - particularly the service industries - are composed
mainly of small businesses. This is much harder and it's where you may
need to fall back on industry associations.
Firms are asked about the usual key variables: sales, investment spending, employment, wages, prices and margins.
The
Reserve uses its liaison more to determine where the economy is now -
and where particular industries are in their business cycle - than where
it's headed.
Most of the intelligence it produces ends up fitting
reasonably well with the official statistics, but in some cases it
comes in earlier than the stats.
It's a reasonable fit also with
the NAB survey of business conditions and confidence, which the Reserve
always studies carefully.
The Reserve's well-established links
with key businesses allow it to "hit the phones" at times of great
uncertainty, such as the global financial crisis. Its liaison made it
among the first to realise business was responding differently to the
downturn in demand, preferring wage freezes and cuts in hours to mass
layoffs.
Its contact with miners made it among the first to
realise the biggest hangover from the Queensland cyclone in 2011
wouldn't be farming but the surprising delay in getting the water out of
flooded coalmines.
Right now its resource contacts will help
improve its guesses about the precise timing of the probably sharp
fall-off in mining investment spending.
By now other central
banks, including the Bank of Canada and the Bank of England, also
conduct big business liaison programs, but our lot were early adopters.
Now
you're better informed about the Reserve's use of liaison you're likely
to be more conscious of the many references to its findings in the
bank's pronouncements.
The Reserve regularly reviews the accuracy
of its forecasts and publishes the sobering results. So does Treasury,
for that matter. Neither institution pretends its forecasts are much
more than educated guesses.
The central bankers haven't been able to detect that their liaison has done anything to improve the accuracy of their forecasts.
But
it would a brave - or foolhardy - person who concluded from this that
it was wasting its time. Managing the economy without major mishap is a
bit trickier than getting forecasts spot on.
