The UK’s construction conundrum – can we trust the numbers?

Last week we saw some welcome news from the UK Office for National Statistics (ONS) as we were told that construction output had risen by 2.5 per cent between March and April.

This of course added to the better industrial production and manufacturing numbers which makes April look very spring like.

Unfortunately there are real problems with the way we try to measure construction output in the UK. This is put officially like this:

On 11 December 2014 the UK Statistics Authority announced its decision to suspend the designation of Construction Output and New Orders as National Statistics.

– Office for National Statistics

The reason for this is that there is no real confidence in the measures for inflation used, called deflators. This is a problem pretty much throughout the way that UK official statistics treat the housing sector.

Those who follow my critiques of how we measure inflation in the housing sector and hence consumer inflation will know that not only do we measure the wrong thing in my opinion, we have been poor at measuring the wrong thing when we use rents as a proxy for house prices.

Big changes

The problems with the construction series have been highlighted by the fact that there have been some very large revisions.

For instance, the ONS has confirmed:

Construction output increased by 1.4 per cent in Quarter 2 2015, revised up 1.2 percentage points from the previously published estimate.

– Office for National Statistics

That is a particularly large one and as you can see a 1.2 point revision of a number which was originally 0.2 per cent speaks for itself. This is because there have been some large changes to what was counted, as this from the Brickonomics blog last year highlights:

It appears in March there was a reallocation of a major business from the services sector to construction. When I say major I mean a firm turning over significantly more than £1bn a year, probably more like £3bn.

– Brickonomics

Quite a lot of money in terms of construction output. It led to this:

In April the ONS decided that on an annualized constant price basis the industry was £3.7 billion bigger than it was thought a month earlier. Blimey.

– Brickonomics

Then there is the contradiction with business surveys.

The purchasing managers index for construction calculated by Markit adds to the confusion as whilst it agreed with the April rise it has been positive on occassions in 2016 whereas the official numbers show a fall. Markit says it thinks it is clear there is now a declining trend in construction – just as we get a positive monthly reading from the ONS.

In short

Take great care with these numbers and throw in a pinch of salt. I have taken to counting cranes myself – although that has the bias of the fact I live near Nine Elms.