Chapter

Macroeconomic and
12 Industry Analysis

Bodie, Kane, and Marcus

Essentials of Investments
12th Edition

© 2022 McGraw Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw Hill.
 12.1 Global Economy
National Economic Environment:
• Crucial determinant of industry performance.
• Harder for businesses to succeed in a
contracting economy.

Exchange Rate:
• Rate at which domestic currency can be
converted into foreign currency.

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 Table 12.1 2018 Stock Market Return (%)
Stock Market Return, 2018 Stock Market Return, 2018
(%): In Local Currency (%): In U.S. Dollars GDP Growth (%)
Brazil 19.1% 1.9% 1.3
Britain −12.4% −17.9% 1.5
Canada −11.5% −18.7% 2.1
China −25.5% −29.3% 6.5
France −11.7% −16.7% 1.4
Germany −18.1% −22.8% 1.2
Hong Kong −16.0% −16.1% 2.9
India 5.4% −4.6% 7.1
Italy −16.1% −20.9% 0.7
Japan −12.1% −9.8% 0.0
Mexico −14.4% −14.7% 2.5
Russia −7.6% −22.7% 1.5
Singapore −10.7% −13.3% 2.2
South Korea −18.5% −22.7% 2.0
Spain −14.9% −19.8% 2.5
U.S. −6.1% −6.1% 3.0

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 Figure 12.1 Change in Real Exchange Rate

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 12.2 The Domestic Macroeconomy 1

Gross Domestic Product (GDP):

• Market value of goods and services produced
over period of time.

Unemployment Rate:
• Ratio of number of unemployed to total labor
force.

Inflation:
• Rate at which general level of prices for goods
and services is rising.
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 12.2 The Domestic Macroeconomy 2

Interest Rates:
• High interest rates reduce present value of future
cash flows.

Budget Deficit:
• Government spending in excess of government
revenues.

Sentiment:
• Consumer optimism/pessimism.

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 Figure 12.2 S and P 500 Index versus Earnings per
Share

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 12.3 Interest Rates
• Fundamental Factors of Interest Rates:
1. Supply of funds from savers.
2. Demand for funds from borrowers.
3. Government’s net supply/demand for funds,
modified by Federal Reserve.
4. Expected rate of inflation.

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 Figure 12.3 Determination of Equilibrium Real Rate of
Interest

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 12.4 Demand and Supply Shocks
Demand Shock:
• Event that affects demand for goods and
services in economy.

Supply Shock:
• Event that influences production capacity and
costs in economy.

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 12.5 Federal Government Policy

Policy Description
Use of government spending and taxing for stabilizing
Fiscal Policy economy
Actions taken by Board of Governors of Federal Reserve
Monetary Policy System to influence money supply/interest rates
Address productive capacity of economy, goal is to induce
Supply-Side Policies workers/owners to produce goods

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 12.6 Business Cycles 1

Business Cycles:
• Recurring cycles of recession and recovery.

Peak:
• Transition from end of expansion to start of
contraction.

Trough:
• Transition point between recession and recovery.

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 12.6 Business Cycles 2

Cyclical Industries:
• Industries with above-average sensitivity to state
of economy.

Defensive Industries:
• Industries with below-average sensitivity to state
of economy.

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 Figure 12.4 Leading and Coincident Indicators

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 12.6 Business Cycles: Leading Indicators 1

Economic series that tend to rise or fall in

advance of rest of the economy:
• Average weekly hours of production workers.
• Initial claims for unemployment insurance.
• Manufacturers’ new orders.
• Institute of Supply Management Index of New
Orders.
• New orders for nondefense capital goods.

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 12.6 Business Cycles: Leading Indicators 2

Economic series that tend to rise or fall in

advance of rest of the economy:
• New orders for nondefense capital goods.
• New private housing units authorized by local
building permits.
• Yield curve: spread between 10-year T-bond
yield and federal funds rate.

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 12.6 Business Cycles: Leading Indicators 3

Economic series that tend to rise or fall in

advance of rest of the economy:
• Stock prices, 500 common stocks.
• Money supply (M2) growth rate.
• Index of consumer expectations for business
conditions.

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 12.6 Business Cycles: Coincident Indicators

Economic series that tend to rise or fall in

tandem with the rest of the economy:
• Employees on nonagricultural payrolls.
• Personal income less transfer payments.
• Industrial production.
• Manufacturing and trade sales.

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 12.6 Business Cycles: Lagging Indicators 1

Economic series that tend to rise or fall

behind the rest of the economy:
• Average duration of unemployment.
• Ratio of trade inventories to sales.
• Change in index of labor cost per unit of output.
• Average prime rate charged by banks.

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 12.6 Business Cycles: Lagging Indicators 2

Economic series that tend to rise or fall

behind the rest of the economy:
• Commercial and industrial loans outstanding.
• Ratio of consumer installment credit outstanding
to personal income.
• Change in consumer price index for services.

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 Table 12.3 Economic Calendar 1

Statistic Release Date* Source Website (www.)

Auto and truck sales 2nd of month Commerce Department commerce.gov
Business inventories 15th of month Commerce Department commerce.gov
Construction spending 1st business day of month Commerce Department commerce.gov
Consumer confidence Last Tuesday of month Conference Board conference-board.org
Consumer credit 5th business day of month Federal Reserve Board federalreserve.gov
Consumer price index Bureau of Labor
(CPI) 13th of month Statistics bls.gov
Durable goods orders 26th of month Commerce Department commerce.gov
Bureau of Labor
Employment cost index End of first month of quarter Statistics bls.gov
Employment record
(unemployment,
average workweek, Bureau of Labor
nonfarm payrolls) 1st Friday of month Statistics bls.gov
National Association of
Existing home sales 25th of month Realtors realtor.org
Factory orders 1st business day of month Commerce Department commerce.gov
Gross domestic product 3rd-4th week of month Commerce Department commerce.gov

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 Table 12.3 Economic Calendar 2

Statistic Release Date* Source Website (www.)

Housing starts 16th of month Commerce Department commerce.gov
Industrial production 15th of month Federal Reserve Board federalreserve.gov
Initial claims for jobless
benefits Thursdays Department of Labor dol.gov
International trade
balance 20th of month Commerce Department commerce.gov
Index of leading
economic indicators Beginning of month Conference Board conference-board.org
Money supply Thursdays Federal Reserve Board federalreserve.gov
New home sales Last business day of month Commerce Department commerce.gov
Bureau of Labor
Producer price index 11th of month Statistics bls.gov
2nd month in quarter Bureau of Labor
Productivity and costs (approx. 7th day of month) Statistics bls.gov
Retail sales 13th of month Commerce Department commerce.gov
Survey of purchasing Institute for Supply
managers 1st business day of month Management ism.ws

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 12.7 Industry Analysis 1

Defining an Industry:
• NAICS codes:
• Classification of firms into industry groups using
numerical codes to identify industries.
• Sensitivity to the Business Cycle:
• Sensitivity of sales.
• Operating leverage.
• Financial leverage.

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 Table 12.5 Examples of NAICS Industry Codes

NAICS Code NAICS Title

23 Construction
236 Construction of Buildings
2361 Residential Building Construction
23611 Residential Building Construction
236115 New Single-Family Housing Construction
236116 New Multifamily Housing Construction
236118 Residential Remodelers
2362 Nonresidential Building Construction
23621 Industrial Building Construction
23622 Commercial and Institutional Building Construction

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 Figure 12.6 Return on Equity, 2018

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 Figure 12.7 Industry Stock Price Performance, 2018

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 Figure 12.8 ROE of Application Software Firms 2019

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 Figure 12.9 Industry Cyclicality

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 12.7 Industry Analysis 2

Sector Rotation:
• Shifting portfolio into industry sectors expected
to outperform.
• Based on macroeconomic forecasts.
• After peak, defensive industries often better
performers.
• In trough, capital goods industries often better
performers.
• In expansion, cyclical industries often better.

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 Figure 12.10 Stylized Depiction of Business Cycle

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 Figure 12.11 Sector Rotation

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 12.7 Industry Analysis 3

Industry Life Cycles:

• Start-up stage:
• Often characterized by new technology/product.
• Consolidation stage:
• Industry leaders begin to emerge.
• Maturity stage:
• Product reaches potential for use by consumers.
• Relative decline:
• May grow less than rest of economy or shrink.

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 Figure 12.12 Industry Life Cycle

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 12.7 Industry Analysis 4

Industry Structure and Performance:

• Threat of entry:
• New entrants to industry pressure price/profits.
• Rivalry between existing competitors:
• Market share competition pressures price/profits.
• Pressure from substitute products:
• Firms in related industries can threaten market share.

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 12.7 Industry Analysis 5

Industry Structure and Performance:

• Bargaining power of buyers:
• Large-scale buyers have considerable bargaining
power.
• Bargaining power of suppliers:
• Large-scale suppliers have considerable bargaining
power.

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 End of Main Content

© 2022 McGraw Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw Hill.