January 5, 2009
Assume you are a newly appointed director of a small, publicly traded
company with sales of about $100mm per year.
The company could be in any sector, so the information need only be
general, but should provide information in laymans terms as to how key
economic indicators such as GDP, currency movements, balance of
payment, balance of trade, employment, housing starts etc. might be
used to assess how an individual company may perform.Hi!
It will be hard to assess such effects if we don't pick an industry
since different economic indicators are more targeted for a particular
industry.
Can we limit the parameters of the question?
Thanks!Limit to automobile manufacturing.Hi!
Another problem would be those of limiting the research to $100m per
year. Is it ok to give an answer for the automobile industry in
general without such limitations?
Thanks!Plus is it ok to answer this per industry and not per company?
Thanks again.Thank you for the question. Below I have isolated the economic
indicators that you specified, and added some other important
indicators, in the hopes of explaining their effects on business and
markets. This analysis should help you formulate the ways in which
these factors will impact specific businesses. I provided brief
introductory summaries for the major indicators and then followed it
up with much more specific source cited information.
I stuck with the general approach of your initial question. If you
would like me to specifically analyze the auto industry as you noted
could be an option, I would be happy to do that as well.
However, as you seem to be seeking general information, I think this
will be a clearer approach that will focus more on the indicators and
not the specific factors that may effect a particular industry.
I hope this helps.
-----------------------------------------------------------------------------------------
General Analysis:
http://economics.about.com/cs/businesscycles/a/economic_ind.htm
"Economic Indicators can have one of three different relationships to the economy:
1. Procyclic: A procyclic (or procyclical) economic indicator is one
that moves in the same direction as the economy. So if the economy is
doing well, this number is usually increasing, whereas if we're in a
recession this indicator is decreasing. The Gross Domestic Product
(GDP) is an example of a procyclic economic indicator.
2. Countercyclic: A countercyclic (or countercyclical) economic
indicator is one that moves in the opposite direction as the economy.
The unemployment rate gets larger as the economy gets worse so it is a
countercyclic economic indicator.
3. Acyclic: An acyclic economic indicator is one that has no relation
to the health of the economy and is generally of little use. The
number of home runs the Montreal Expos hit in a year generally has no
relationship to the health of the economy, so we could say it is an
acyclic economic indicator."
"In 1975, economists at the Commerce Dept. and National Bureau revised
and improved the list of leading indicators. They gave each indicator
a score, based on the three criteria discussed previously, ranging
from 69 to 80. The stock market received the top score of 80. Growth
in the money supply (M2), loosely defined as total currency, checking
accounts, personal money market accounts and some CDs, was second with
a score of 79."
---------------------------------------------------------------------------------
Employment:
**Individual businesses can expect high employment figures to
potentially increase the purchasing power of their customer base, thus
increasing sales, etc. Basically, employed people have more money to
spend. They can also expect that the economy is likely in a growth
cycle in general.
If unemployment rates are high it follows that people likely have less
money to spend and the economy is in general decline. However, when
large portions of the population are unemployed, individual businesses
have more leverage to reduce wages and benefits, as competition for
jobs is greater. This can allow for profits if the products are still
able to sell despite a lagging economy.
Sources:
http://economics.about.com/cs/businesscycles/a/economic_ind_2.htm
"Employment, Unemployment, and Wages
These statistics cover how strong the labor market is and they include
the following:
* The Unemployment Rate [monthly]
* Level of Civilian Employment[monthly]
* Average Weekly Hours, Hourly Earnings, and Weekly Earnings[monthly]
* Labor Productivity [quarterly]
The unemployment rate is a lagged, countercyclical statistic. The
level of civilian employment measures how many people are working so
it is procyclic. Unlike the unemployment rate it is a coincident
economic indicator."
http://pages.stern.nyu.edu/~nroubini/bci/EmploymentPayroll.htm
"Likely Impact of Financial Markets:
Interest Rates: Larger-than-expected monthly increase or increasing
trend is considered inflationary causing interest rates to rise. The
bond market views a weak report favorably and vice-versa. The report
also make it more likely that the Fed will increase the Fed Funds rate
that is also bearish for the bond market.
Stock Prices: Ambiguous. On one side higher than expected growth
leads to higher profits and that's good for the stock market. On te
other, it may increase expected inflation and lead to higher interest
rates that are bad for the stock market. The first effect dominates in
recessions and early stages of economic recovery while the second
dominates when the economy is close to full capacity.
Exchange Rates: Larger than expected employment growth will tend to
appreciate the exchange rate as it is expected to lead to higher
interest rates."
Unemployment Rate:
http://pages.stern.nyu.edu/~nroubini/bci/Unemploymentrate.htm
"Likely Impact on Financial Markets:
Interest Rates: Larger-than-expected monthly fall in the unemployment
rate is considered inflationary causing interest rates to rise. The
bond market views an increase unemployment rate favorably especially
when the economy is close to full capacity and the unemployment rate
is close to its "natural rate". A falling unemployment rate also make
it more likely that the Fed will increase the Fed Funds rate that is
also bearish for the bond market.
Stock Prices: Ambiguous. First, lower unemployment rate signals a
strong economy, higher potential profits and that's good for the stock
market. Second, lower unemployment may increase expected inflation and
lead to higher interest rates that are bad for the stock market.
Third, lower unemployment rate may lead to higher wage inflation that
is bearish for the stock market. The first effect dominates in
recessions and early stages of economic recovery while the second and
third dominate when the economy is close to full capacity and the
unemployment rate is low
Exchange Rates: Lower than expected unemployment rate will tend to
appreciate the exchange rate as it is expected to lead to higher
interest rates."
http://www.meansbusiness.com/Finance-and-Profitability-Books/Using-Economic-Indicators-to-Improve-Investment-Analysis.htm
"One of the most common economic indicators, possibly second only to
inflation, is the civilian unemployment rate. The unemployment rate
rises during cyclical downturns and falls during periods of rapid
economic growth."
http://www.findarticles.com/p/articles/mi_m3254/is_n2_v210/ai_13806771
"If business activity continues to slow, employers may be forced to
lay off some employees. Thus, we begin to see a trend of increasing
claims for unemployment insurance.
These two measures of economic activity are leading indicators. A
continued decline in the length of the factory work week and increase
in initial claims for unemployment insurance logically are symptoms of
an ailing economy.
The next domino to tumble is employment on non-agricultural payrolls.
We tend to see a trend of contraction in employment across the board
as the economy falls into recession. The fact that employment declines
in conjunction with the economy at large makes it a coincident
indicator. Realistically, when a nation has fewer people working, it's
going to produce fewer goods and services."
"As you may know, the unemployment rate is defined as the ratio of the
number of unemployed people to the size of the entire labor force. The
number of unemployed people is defined as everyone over the age of 16
who is actively seeking employment but can't find it. The labor force
consists of the number of people holding jobs plus the number of
unemployed (as defined above). Both of these numbers exclude
discouraged workers.
The discouraged worker does not have a job and has stopped seeking
employment. Therefore, he or she is not considered unemployed or a
member of the labor force."
--------------------------------------------------------------------------------
GDP:
**GDP is most valuable in calculating general economic trends. It is
also valuable in indicating how valuable domestic products will be
oversees. An individual business is likely to be somewhat more able to
compete both domestically and abroad when the GDP is high and
indicates growth, and vice versa.
Sources:
http://economics.about.com/cs/businesscycles/a/economic_ind_2.htm
"The Gross Domestic Product is used to measure economic activity and
thus is both procyclical and a coincident economic indicator.
The Implicit Price Deflator is a measure of inflation. Inflation is
procyclical as it tends to rise during booms and falls during periods
of economic weakness. Measures of inflation are also coincident
indicators. Consumption and consumer spending are also procyclical and
coincident."
http://pages.stern.nyu.edu/~nroubini/bci/GDP.html
"Likely Impact on Financial Markets:
Interest Rates: Unexpectedly high quarterly GDP growth is perceived to
be potentially inflationary if the economy is close to full capacity;
this, in turn, causes bond prices to drop and yields and interest
rates to rise. Also, higher than expected GDP growth, i..e. good news
about the economy, is bad news for the bond market because a strong
report causes concern that the Fed might raise the Fed Funds rate to
avoid higher inflation. This is bearish for the fixed income market.
Stock Prices: Ambiguous. On one side higher than expected growth leads
to higher profits and that's good for the stock market. On te other,
it may increase expected inflation and lead to higher interest rates
that are bad for the stock market.
Exchange Rates: Larger than expected GDP growth will tend to
appreciate the exchange rate as it is expected to lead to higher
interest rates."
----------------------------------------------------------------------------------------
Stock Market:
**If the company in question is publically traded, stock market
performance is a very valuable indicator. Upward trends signal
investor confindence and can lead to rapid growth in individual
companies that gain stockholders.
Similarly, downward trends can signal complete bust of certain
companies, as they rapidly lose stockholders, they must cut costs and
empoyees to stay in business, and some aren't able to maintain afloat.
Sources:
Using economic indicators - business cycles in the printing industry -
includes related article
American Printer, Nov, 1992 by Carole Portas
http://www.findarticles.com/p/articles/mi_m3254/is_n2_v210/ai_13806771/pg_2
"Upward trends in the stock market tend to indicate investors'
confidence in the market, which is an indication of their confidence
in the economy at large. The main reason someone buys a particular
stock is that he/she expects to get a return on investment, generally
in the form of stock dividends. The higher a company's earnings, the
more generous it can be with distributing earnings. As a result, more
people will want to buy stocks, leading to increases in prices.
High corporate profits spur new investment and increased production
and employment--all of which promote further economic growth.
Expectations of poor profits, on the other hand, would induce
investors to sell their stocks, which lowers prices."
--------------------------------------------------------------------------------------
Money Supply:
**the money supply primarily indicates the ability of companies,
individuals, etc. to borrow money, as it coincides strongly with
interest rates. Growth in the money supply often means increases in
sales for individual companies.
Sources:
"Growth in the country's money supply is one of the best leading
indicators because of its impact on future economic growth. Increases
in M2 tend to put downward pressure on interest rates, because the
more money that's available to borrow, the lower will be the level of
competition in credit markets--thus the cost of borrowing diminishes.
Growth in M2 also may indicate increased personal income, which means
increased personal consumption. Consumer spending is an important part
of economic recovery and expansion because additional consumption
increases the overall demand for goods and services. Inventories
become thin and employers have to hire additional units of labor in
order to keep pace with the demand."
----------------------------------------------------------------------------------------------
International Trade:
**For companies that trade internationally, the balance of trade,
balance of payments, etc. are critical indicators. When the balance of
trade is in the favor of the companies home country, they are often on
the winning side exchange rates, tarriffs, and the supply and demand
market economics of the global economy.
Likewise, when the home country is in a massive trade defecit, it may
be more difficult to make a profit exporting the respective product,
cutting heavily into profits.
Sources:
http://economics.about.com/cs/businesscycles/a/economic_ind_3.htm
"These are measure of how much the country is exporting and how much
they are importing:
* Industrial Production and Consumer Prices of Major Industrial Countries
* U.S. International Trade In Goods and Services
* U.S. International Transactions
When times are good people tend to spend more money on both domestic
and imported goods. The level of exports tends not to change much
during the business cycle. So the balance of trade (or net exports) is
countercyclical as imports outweigh exports during boom periods.
Measures of international trade tend to be coincident economic
indicators."
http://pages.stern.nyu.edu/~nroubini/bci/InternationalTrade.html
"Likely Impact on Financial Markets:
Interest Rates: Modest
Stock Prices: Modest. Stock prices may fall if a significant worsening
trade balance indicates a loss of competitiveness of domestic firms.
Exchange Rates: A worsening of the trade balance (a fall in net
exports) may lead to an exchange rate depreciation required to
restore competitiveness. However, a worsening trade balance may
indicate high economic growth that is leading to higher imports; as
interest rates tend to increase when growth is high, the exchange rate
may appreciate following a worsening of the trade balance."
http://en.wikipedia.org/wiki/Balance_of_trade
"Balance of trade figures are the sum of the money gained by a given
economy by selling exports, minus the cost of buying imports. They
form part of the balance of payments, which also includes other
transactions such as the international investment position.
The figures are usually split into visible and invisible balance
figures. The visible balance represents the physical goods, and
invisible represents other forms of trade, e.g. the service economy.
A positive balance of trade is known as a trade surplus and consists
of exporting more (in financial capital terms) than one imports. A
negative balance of trade is known as a trade deficit and consists of
importing more than one exports. Neither is necessarily dangerous in
modern economies, although large trade surpluses or trade deficits may
sometimes be a sign of other economic problems."
"If the balance of trade is positive, then the economy has received
more money than it has spent (exported more than it has imported).
This may appear to be a good thing but may not always be so. An
example of an economy in which a positive balance of payments is
generally regarded as a bad thing is Japan in the 1990s. Because Japan
had a consistently positive balance of payments, it had more currency
than it could effectively invest. This led to huge Japanese overseas
purchases of items such as real estate, which were of questionable
economic usefulness. Furthermore, the protectionist measures that
created the positive balance of trade also caused the price of goods
in Japan to be much higher than they would have been had imports been
freely allowed.
Negative balances are not necessarily terrible news, either. In
particular, an effect known as reserve currency status makes it
possible for dominant currencies to run significant trade deficits
with limited economic impact. Because the United States dollar is
generally regarded to be extremely stable, dollars which are exported
are held by persons overseas and there is no pressure to return them
to the United States. Furthermore, countries running large trade
surpluses (e.g. China and Japan) use these funds to purchase US
Treasury Notes, essentially allowing the United States to export
monetary paper and get real goods and services in return. The pricing
of oil in US dollars also forces nations and institutions to hold some
of their reserves in US dollars in order to hedge against the rapid
rises and falls in prices of this all-essential energy source."
Balance of Payments:
http://en.wikipedia.org/wiki/Balance_of_payments
"If more money flows in than out, one has a positive balance of
payments; if more flows out than in, one has then a negative balance.
The money flowing over the border is like other money paying for
goods, commodities, real estate, services, securities."
"For a country to have a zero balance of payments, a current account
deficit must be balanced by a capital account surplus. The US have
been running a negative current account for a long while, which is
financed through a positive financial account. The only way to buy
more than you sell is to borrow money.
A country will have a negative balance of payments (i.e., there is to
be a net flow of money out of the country) if the net of the current
account and the capital account is a deficit. Similarly, there will be
a positive balance of payments (i.e., a net flow of money into a
country) if the net of the current and the capital account results in
a surplus."
---------------------------------------------------------------------------------------------
Housing Starts:
http://pages.stern.nyu.edu/~nroubini/bci/HousingStarts.htm
"The housing industry accounts for about 27% of investment spending
and 5% of the overall economy. Housing starts is important because it
is a leading indicator. Sustained declines in housing starts slow the
economy and can push it into a recession. Likewise, increases in
housing activity triggers economic growth. "
"Likely Impact on Financial Markets:
Interest Rates: Larger-than expected monthly increase or increasing
trend is considered inflationary, causing bond prices to drop and
yields and interest rates to rise. "
-------------------------------------------------------------------------------------
Production and Business Activity:
http://economics.about.com/cs/businesscycles/a/economic_ind_2.htm
"These statistics cover how much businesses are producing and the
level of new construction in the economy:
* Industrial Production and Capacity Utilization [monthly]
* New Construction [monthly]
* New Private Housing and Vacancy Rates [monthly]
* Business Sales and Inventories [monthly]
* Manufacturers' Shipments, Inventories, and Orders [monthly]
Changes in business inventories is an important leading economic
indicator as they indicate changes in consumer demand. New
construction including new home construction is another procyclical
leading indicator which is watched closely by investors. A slowdown in
the housing market during a boom often indicates that a recession is
coming, whereas a rise in the new housing market during a recession
usually means that there are better times ahead."
-------------------------------------------------------------------------------------------
Consumer Price Index (CPI):
http://pages.stern.nyu.edu/~nroubini/bci/ConsumerPriceIndex.htm
"The consumer price index (CPI) is considered the most important
measure of inflation. It compares prices for a fixed-list of goods and
services to a base period. Currently, the base period, which equals
100, is the average prices in the 1982-1984 period. "
"Likely Impact on Financial Markets:
Interest Rates: Larger-than-expected quarterly increase in price
inflaton or increasing trend is considered inflationary; this will
cause bond prices to drop and yields and interest rates to rise.
Stock Prices: Higher than expected price inflation is bearish on the
stock market as higher inflation will lead to higher interest rates.
Exchange Rates: High inflation has an uncertain effect. It would lead
to a depreciation as higher prices mean lower competitiveness.
Conversely, higher inflation causes higher interest rates and a
tighter monetary policy that leads to an appreciation."
_____________________________________________________
Additional Links:
Business Cycle Indicators
http://pages.stern.nyu.edu/~nroubini/bci/Bci.html
United States Economic Statistics
http://www.fedstats.gov
IMF Statistics
http://dsbb.imf.org/Applications/web/sddsnsdppage/
---------------------------------------------------------------------------------------
Google Search Terms:
"using economic indicators"
"economic indicators" business
"business cycle" and "economic indicators"
-----------------------------------------------------------------------------------------
Thanks again for the question. Please don't hesitate to request
clarification if you require further explanation or detail.
-adiloren-ga#If you have any other info about this subject , Please add it free.# |
|
Categorized in kciandjojowav.com edit