The author writes on page 31:
"At the beginning of 2001, the economy was not in recession. The fourth quarter of 2000 data had not been released but would, in time, show that the economy had grown by 2.2 percent in twelve months. Forecasters were nervous, however. The consensus forecast published by the Federal Reserve Bank of Philadelphia in February 2001 predicted a mere 0.8 percent growth in the first quarter. Also of significance, the forecasters had revised their numbers down from 3.3. percent growth in the prior survey three months earlier. That should have been a tip-off that the economy needed watching... However, executives who saw the lowered forecast in early 2001 and thereafter watched the economy closely were in a far superior position to those managers who chugged forward as if nothing were amiss."It shows how a business manager should use macroeconomic forecasts. Go to the Federal Reserve Bank of Philadelphia and open the latest forecast report by clicking this link to Survey of Professional Forecasters. What is your reading? Is it time to watch the economy closely for an incoming downturn? Is the Philadelphia Fed’s forecast consistent with the six economic indicators we analyzed in the real-world applications three assignment?
Write your answer below this line. In the third quarter of 2022, 35 different professional forecasters have come to the conclusion that the US economy looks weaker now than it did three months ago. Last quarter, forecasters predicted a growth in real GDP at an annual rate of 2.5% for this quarter, but now they predict it will only be 1.4%. They also expect real GDP to grow at an annual rate of 1.6% in 2022 and 1.3% in 2023, which are lower estimates than those of three months ago. According to the Fed’s report, unemployment rates will increase from 3.7% in 2022 to 3.9% in 2023 and remain at the same rate of the next two years. This is not a very drastic increase, but from Real-World Applications 3, we saw that during every recession the unemployment rate went up. This might be an early warning sign, especially if the rate increases again soon. From one of the charts that the Fed provided, we can see that the new predictions of unemployment rate are higher in every quarter than the previous expectations. In the same chart, the real GDP percent growth is also lower in every quarter by almost one percent-point. This is definitely a warning sign, and a company like Bank of New Hampshire should be looking at their recession-plan, because it is important to take precautions before a recession might happen. Another concerning fact from the Fed’s forecast report is that the CPI is higher in every quarter than it was in previous reports, and from week 3, there was an increase peak in CPI at the start of every recession. An increase from 4.5 to 6.7 in 2022-Q3 should warn managers, and I am certain in that Bank of New Hampshire should be cautious about their next loans and mortgages, and they should be watching these forecasts with eagle eyes. One of the biggest warning signs is that the forecasters have increased their estimate of the risk of a downturn this quarter to 33.9%, compared with 19.7% in the survey of three months ago. This means that it is absolutely time to watch the economy closely for an incoming downturn. My recommendations to Bank of New Hampshire is to use predictive analysis of the economy, but also consider more quantitative easing policies and they must evaluate the strength of existing monetary policies.
| Question | Response from the company |
|---|---|
Sales can swing wildly. If the company’s too slow in responding to a sudden drop in sales, it could go bankrupt. If it is too slow in responding to a large upswing, it could lose its market share. It could even develop a reputation of an unreliable vendor. Please, discuss your early warning system, if you have one. |
The level of our car inventories which we watch closely is a great early warning indicator. In the car business, we get to see what our competitors are selling daily so we have perspective on not just what we are selling, but how our competitors are fairing as well. Certainly, we pay close attention to what our manufacturing partners are telling us as well as the National Auto Dealers Association, our industry trade group. |
| Question | Response from the company |
|---|---|
Sales can swing wildly. If the company’s too slow in responding to a sudden drop in sales, it could go bankrupt. If it is too slow in responding to a large upswing, it could lose its market share. It could even develop a reputation of an unreliable vendor. Please, discuss your early warning system, if you have one. |
The bank builds up loss reserves, conducts expense reviews, tries to maximize yield on assets, looks to sell less profitable assets, e.g. low yielding loans. The bank also conducts various annual stress tests and scenario analyses to identify potential problems that could arise during an adverse economic event. Corrective action is taken to mitigate these risks if the exposure is outside of acceptable ranges. |
| Question | Response from the company |
|---|---|
Sales can swing wildly. If the company’s too slow in responding to a sudden drop in sales, it could go bankrupt. If it is too slow in responding to a large upswing, it could lose its market share. It could even develop a reputation of an unreliable vendor. Please, discuss your early warning system, if you have one. |
Our staffing is very light, and we utilize outsourcing when we are busy. In a downturn we can return to in house production. |