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:

• They would like to know when downturns and upturns in sales are coming
• How deep/steep of a decline/increase will be if the economy accelerates or slows
• Managers need to know their industry, being able to interpret the data and make accurate predictions on rising and falling prices comes from experience

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

Gross Domestic Product

Profits across the Economic Cycle

• corporate profits are more volitile than the overall economy because costs font change proportionately with sales.
• Profits are more volitile than overall production.

Consumer Spending

• accounts for 2/3rds of GDP so cant rise or fall too far from the total GDP.
• when income declines its important cut back on spending habbits proportionately to the wage change.

GDP vs Consumer Spending

GDP vs Consumer Services

GDP vs Consumer Durables

GDP vs Consumer Non-Durables

Housing

• one of the most volitile sections of economy
• interest rates determine rises and drops in the housing cycle, in turn drives the overall economy
• Housing sector tends to weaken before the whole economy does, so its a good indicator for whats to come

GDP vs Nonresidential Construction

Capital Spending

• Purchases of plant and equipment
• tends to lag behind overall business cycle

Government Spending

• weak federal spending can trigger a recession
• however recesions dont hurt federal spending becuase the gov can run deficits
• usually not correlated with economic cycles

Exports

• exports display large seings but they are not strongly correlated with the American economic cycle

Imports

• domestic demand for certain types of goods or services creates an import demand

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)

• constitutes the market value of the goods and services produced within the United States.

Real versus nominal GDP

*real GDP is just the inflation adjusted product whereas nominal is used less frequently and refers to more data not adjusted for inflation.

Gross National Product (GNP)

*serves as the main gauge of economic production

Recession

*A general contraction of business activity, monitering the depth and breadth of teh downturn in production.

Leading Indicators

*something that points you the way that the rest of the economy will later move in.

Economic events

2007 Great recession

• From the end of 2007 to mid 2009 the great depression severely changed our country, financial effects like housing prices dropped about 30% while the S&P 500 index fell 57 percent.