Week 3: Best Practices 2

Ch2 Cycles in Your Sector of the Economy

## # A tibble: 1,096 × 5
## # Groups:   symbol [8]
##    symbol date       price   change text                
##    <chr>  <date>     <dbl>    <dbl> <glue>              
##  1 GDPC1  1947-01-01 2034. NA       1947.1,
## Growth: NA   
##  2 GDPC1  1947-04-01 2029. -0.00267 1947.2,
## Growth: -0.3%
##  3 GDPC1  1947-07-01 2025. -0.00207 1947.3,
## Growth: -0.2%
##  4 GDPC1  1947-10-01 2057.  0.0156  1947.4,
## Growth: 1.6% 
##  5 GDPC1  1948-01-01 2087.  0.0150  1948.1,
## Growth: 1.5% 
##  6 GDPC1  1948-04-01 2122.  0.0165  1948.2,
## Growth: 1.7% 
##  7 GDPC1  1948-07-01 2134.  0.00573 1948.3,
## Growth: 0.6% 
##  8 GDPC1  1948-10-01 2136.  0.00112 1948.4,
## Growth: 0.1% 
##  9 GDPC1  1949-01-01 2107. -0.0138  1949.1,
## Growth: -1.4%
## 10 GDPC1  1949-04-01 2100. -0.00341 1949.2,
## Growth: -0.3%
## # … with 1,086 more rows

Chater Openning Questions

Managers need to know:

• Managers would prefer to understand when upturns and downturns in sales are on the horizon. Understanding this part of the economy will help managers figure out how long a decline will be or how steep an incline might be. Furthermore, managers must know when costs will rise or fall. The economy will play a role in some costs, but basic understanding of a products supply and demand will also play a role. Outlooks on interest rates serve as key roles in financial strategies for companies. Managers will use economic data to plan accordingly to issues such as inflation, crisis, and employment.

Solution

your customers/products	magnitude of spending changes	timing of spending changes
consumer services	very stable	coincident with GDP
consumer nondurables	stable	coincident with GDP
consumer durables	volatile	coincident with GDP
housing construction	very volatile	leads fluctuations in GDP
capital spending	very volatile	lags fluctuations in GDP
govt. spending, federal	moderate	not always corr. with GDP
govt. spending, state & local	stable	lags fluctuations in GDP
exports	volatile	not corr. with GDP
imports	volatile	varies depending on product

Historical Experience

Recession are a period of decline in the economy that can be identified by a fall in GDP for two straight economic quarters. GDP helps economists better understand and predict future economic outlooks. On average America has seen a recession once every six years which is trending away from the pre-WWII trend where they were more common. Recently the economy has become more stable with a shift from goods to services along with focuses on inventory and an overall reduction of volatility of the economy. Time will tell if this trend of a more stable economy continues.

Gross Domestic Product

Profits across the Economic Cycle

An economic cycle is the overall state of the economy through the Cyclical phases: expansion, peak, economic growth, reversal, recession and depression. Small changes in GDP have historically shown vast changes in profits across the board economically. Profits have shown to be far more volatile than overall production.

Consumer Spending

Consumer spending is the value of total goods and services purchased by residents of the United States. It accounts for almost 2/3 of GDP Records show that consumer spending doesn’t swing up or down As much as GDP as a whole. This component of the economy ca help businesses predict consumer behavior thus making decisions on employment and investing.

GDP vs Consumer Spending

GDP vs Consumer Services

GDP vs Consumer Durables

GDP vs Consumer Non-Durables

Housing

Housing comnstruction is one of the most volatile sectors of the economy. Interest rates drive the housing cycle which therefore drives the overall economic cycle. The housing sector can serve as a leading indicator for the economy. When this market weakens, it usually does so before the entire economy turns to a downward trend.

GDP vs Nonresidential Construction

Capital Spending

Capital spending lags behind the rest of tghe economy when it comes to the business cycle both on the upside and down. It is extremely important when people sell any type of equipment. Since this line of business has longer lead times it can be difficult to keep in line with the business cycly as spending continues after the cycles peak; especially with office building and airplanes.

Government Spending

Federal government spending usually doesn’t correlate with economic cycles. State and local government spending is the opposite as it is affected by the economy, especially with states depending on income taxes. Changes in overall spending lag compared to the economic cycle as well. # Exports Exports are a middle of the road sector of the economy when it comes to volatility. They display large swings but usually don’t correlate to the American economic cycle. Conditions of global foreign economies and U.S. exchange rates serve as determining factors causing a lead or lag between U.S. exports and GDP.

Imports

Demand is the key factor in determining whether imported goods are beneficial to an economy. Domestic demand is important when importing a good or service. This can cause extreme volatility for imported goods because many goods America imports are unstable over a longer period of time. # Economic terms Explain each of the following terms in your own words. The author explains the terms in the textbook. If necessary, you may also Google the term on the Web. Good resources include:

• The Economist
• Fun economic videos

Gross Domestic Product (GDP)

Gross Domestic Product constitutes the market value of all goods and services produced in the United States.

Real versus nominal GDP

Real GDP is when economists adjust for price changes due to inflation, whereas nominal GDP is calculated at the current market price.

Gross National Product (GNP)

Gross National product is the total value of goods and services provided by a country during one year.

Recession

A recession is a cycle when there is a general decline in economic activity. These occur when there is a widespread decline in spending. Recessions happen when there are two consecutive quarters of declining GDP.

Leading Indicators

Leading Indicators are any measurable or observable variable that can predict changes or movements helping policymakers predict future economic situations.

Economic events

2007 Great recession

Describe the event in your own words here. Include its causes and impacts on the economy and society. You may Google it and find information on the Web.

The Great Recession was a recession that took place in 2007 where the housing market collapsed because of low interest rates, poor regulation on banks, and ridiculous decisions made by lenders to people with poor credit. Risky Loans defined as subprime mortgages were loans issued to borrower with low credit and served as catalysts to the recession.