Oz recession deepens

This is an unweighted composite index^ of the AIG (Australian Industry Group's) PMIs for manufacturing, services and construction, and S&P Global's PMIs for manufacturing and services.  The AIG indices have been smoothed with a 7-month centred moving average before inclusion in this composite index.

Conclusion: the Ozzie recession* continues.

^ Note on composite indices.

Since time series are subject to random month-to-month and quarter-to-quarter fluctuations, interpreting the data can be tricky. You can reduce this random variability by adding two or more statistically independent series together.  This will reduce the error term without affecting the underlying trend.  Or you can fit a moving average to the data, which also reduces the error term, as each month's "error" is statistically independent of the previous month's.  I tend to do both.  So, this composite index of 5 different time series, 3 of which have been smoothed before inclusion, should give us a much more reliable indicator of the economy than any single component.

* Note on the definition of a recession.

The conventional definition (in the media, anyway) is two quarters of consecutive negative GDP growth.   A moment's thought shows that this is not a useful definition.  Just one example—suppose GDP falls by 5% in Q1, rises by 0.1% in Q2 and falls again by 5% in Q3.  It is crystal clear that there has been a recession from Q1 to Q3.  The conventional definition would deny that a recession has taken place.  

Also, should you use GDP or GDP per capita?  If you have rapid population growth, as Australia has had over the last five years because of very high immigration, GDP per capita has on occasion fallen when total GDP has risen.  To most people that will "feel like" a recession, though one might argue that it isn't.

You could use smoothed GDP, by for example fitting a moving average to the data, and then seeing whether the moving average has declined.  Or, as I tend to, you could examine 30 or 50 or 100 series and see how many are falling or rising.  If more than half are falling, it's a recession.  That is what my diffusion indices attempt to estimate.

I haven't updated my Oz coinciding index or diffusion indices—I need to update my data banks, and the way I feel right now, that's all too tedious—but I'm quite certain Australia is in a recession.  However, I'll update my data shortly, and then confirm the exact month I think it started.