Page 239 - Encyclopedia of Business and Finance

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Economic Analysis

efforts. These changes propel fluctuations in the overall the other hand, when a period of recession (during which
state of the economy and influence courses of action and unemployment is extremely high and wages are very low),
the timeliness of actions. Nonprofit organizations, for gives way to a period of recovery (characterized by
example, may find that fund-raising efforts fueled by per- increases in employment and income), a production man-
sonal contributions are more successful during periods of ager should begin to plan for increased outputs. Just as the
economic prosperity. A first-time home buyer may be truck driver saw the red light and recognized it as a signal
more inclined to purchase a house when interest rates are to start braking, decision makers must see changing eco-
low and prices are likely to increase in future months. nomic conditions and make appropriate responses.
Since decision makers cannot control economic forces, a
concerted effort should be made to monitor such forces.
THE PROCESS OF CONDUCTING
All business executives know that it is important to gain
AN ECONOMIC ANALYSIS
some idea of what general business conditions will be in Conducting an economic analysis requires the application
the months or years ahead. Fortunately, certain economic of scientific methods to break down economic events into
indicators or indices enable decision makers to forecast separate components that are easier to analyze. The
oncoming changes in economic forces. Since both indi-
remainder of this article discusses the steps included in
viduals and organizations operate in a dynamic economic this process.
environment, losing sight of what is going on can be dis-
astrous for either.
Step 1—Identify Appropriate Economic Indicators. The
first step in the process of conducting an economic analy-
THE BUSINESS CYCLE sis is to identify appropriate economic indicators for spe-
Fluctuations in the economy tend to follow a general pat- cific economic forecasts or trends. While various
tern that is commonly referred to as the business cycle. indicators may be selected, they are usually classified as
The business cycle, in the traditional view, consists of four indicators that lead, lag, and/or are coincident with eco-
stages—each of which may vary in terms of duration and nomic conditions. Measures of data derived from eco-
intensity. The four stages are prosperity, recession, depres- nomic indicators yield valuable information for the
sion, and recovery. identification of economic trends and the preparation of
Up-to-date charts, tabulations, and measures of rele- specific economic forecasts.
vant economic indicators are published by the Bureau of
the Census in the monthly report, Business Cycle Develop- Step 2—Collect Economic Data. Once the identification
ments. Economic indicators are predictors or gauges that of indicators has been completed, the second step, which
signal cyclical movement of the economy within each is the collection of economic data yielded by the indica-
stage of the business cycle or from one stage to another. A tors, can begin. Data collection is accomplished through
few examples of economic indicators include average observation and/or by reviewing measures of economic
workweek in manufacturing, new building permits for performance, such as unemployment rates, personal
private housing, new orders for durable goods, and income and expenditures, interest rates, business invento-
changes in consumer installment debt. While various gov- ries, gross product by industry, and numerous other eco-
ernment agencies collect and report monthly, quarterly, nomic indicators or indices. Such measures of economic
semi-annual, and annual measures of numerous economic performance may be found in secondary sources such as
indicators, economists representing various industries and business, trade, government, and general-interest publica-
other decision makers analyze and interpret the data. tions. The Bureau of Economic Analysis (BEA), contained
Timing is everything when it comes to making good in the U.S. Department of Commerce, provides economic
business cycle-sensitive decisions. Just as a truck driver information via news releases, publications, diskettes,
starts braking before reaching an intersection with a flash- CD-ROMs, and the Internet. The information may be
ing red light, decision makers need to make appropriate accessed through the Bureau’s Web site
plans before the business cycle passes from one stage to the (http://www.bea.doc.gov), on recorded telephone mes-
next. Prosperity, a period characterized by low unemploy- sages, and in printed Bureau of Economic Analysis Reports.
ment and relatively high incomes, is followed by recession, Such economic data are also available online through
a period during which unemployment rises and total buy- STAT-USA’s Economic Bulletin Board.
ing power declines, leading to decreased spending by busi-
ness firms and consumers. A production manager should Step 3—Prepare or Select an Economic Forecast. Of
make appropriate cutbacks prior to the onset of a reces- course, simply gathering information about economic
sion. Failure to do so, in the face of decreasing sales, leads indicators is not enough. Decision makers must use the
to bloated inventories and idle productive resources. On data to identify trends and project forecasts. Decision

216 ENCYCLOPEDIA OF BUSINESS AND FINANCE, SECOND EDITION