Economic Analysis

Chapter 3

Importance of economic analysis

It is important to predict the course of the national economy because economic activity affects corporate profits, investor attitudes and expectations and ultimate security prices Linkage between economic activity and stock price is critical

Economic analysis variables

1. Systematic risk 2.labour intensive or capital intensive 3.State of the stock market 4.state of money and capital market 5.National income and product accounts 6.Receipts and expenditures of various segments of the economy govt. business ,personal 7. Expenditure for defense

Economic analysis..
8. Disposable personal income and per capital real GNP 9.Surveys of intentions of people 10Economy in which economic decisions are made ( decentralized / centralized) 12. Money supply 11.Cyclical indicators timing and economic process

The cyclical timing classification

( Developed by Bureau of Economic Analysis , USA) 1. leading 2. Roughly coincident 3.Lagging

1.Leading indicators
The leading indicators are those time series of data that historically reach their high points ( peaks) or their low points ( troughs) in advance of total economic activity

2. Roughly coincident indicators

RCI reach their peaks or troughs at approximately the same time as the economy 3. Lagging indicators LI reach their turning points after the economy has already reached its own

Indexes of economic indicators composite index of leading indicators

1.Average weekly hours of production workers ( manufacturing) 2.Average weekly initial claims for unemployment insurance 3.Manaufactures new orders ( consumer goods and material industries) 4.Vendor performance 5.Contracts and orders for plant and equipment 6.New private housing units authorized by local building permits

Composite leading indicators..

7.Change in manufactures unfilled orders ( durable goods industries) 8.Change in sensitive material prices 9.Stock prices, 500 common stocks 10Money supply ( M2) 11.Index of consumer expectations

2.Composite index of coincident indicators

1. Employees on nonagricultural payrolls 2.Personal income less transfer payments 3.Industrial Production 4.Manufacturing and trade sales

3. Composite index of lagging indicators

1.Average duration of unemployment 2.Ratio of trade inventories to sales 3.Change in index of labor cost per unit of output 4.Average prime rate charged by banks 5.Commercial and industrial loans outstanding 6.Ratio of consumer installment credit outstanding to personal income 7.Change in consumer price index for services

The Indicator Approach

The indicator approach is most valuable in suggesting the direction of a change in aggregate economic activity ; however ,it tells us nothing of the magnitude or duration of the change To compound, the difficulties, outright errors frequently occur in the data