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. When writing, keep the following in mind.
Multiple forecasters surveyed by the Federal Reserve Bank of Philadelphia stated that the economy’s growth is slowing down. Seeing a slower growth in the economy is an indicator that a recession could be around the corner. The car sales industry is extremely sensitive to the overall economy so it is important that they watch the economy closely so they can prepare. Forecasters believe that the unemployment rate will increase from 3.7% to 3.9% by 2023 and remain at the same rate for about two years. As a company, we want unemployment rates to stay the same or be lower than expected. Unemployment rates and consumer confidence are directly correlated. High unemployment rates lower consumer confidence, and as consumer confidence increases, the unemployment rate decreases. A consistent decline in consumer confidence indicates that a recession could be in the near future. As I stated above, this industry is extremely sensitive to the overall economy; sales decline significantly in a recession. With low consumer confidence, many buyers may back out of the market. I would recommend that my company pays close attention to the economy. They do not want to buy an excessive quantity of inventory if there are indicators of a recession in the near future.
The Philadelphia Fed’s forecast is consistent with the economic indicators we analyzed in the real-world applications three assignment. Looking at the Consumer Sentiment Index, you can see that when it falls below 0, a recession follows. Their forecast is also consistent with the Treasury Yield Index. The Treasury Yield Index is in positive territory when long term rates are higher than short term rates. Before the beginning of recession, the spread falls below 0, indicating a recession may be around the corner.
| 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. |