Economic Analysis

Chapter 3
Importance of economic analysis
It is important to predict the course of the
national economy because economic
activity affects corporate profits, investor
attitudes and expectations and ultimate
security prices
Linkage between economic activity and
stock price is critical
Economic analysis variables
1. Systematic risk
2.labour intensive or capital intensive
3.State of the stock market
4.state of money and capital market
5.National income and product accounts
6.Receipts and expenditures of various
segments of the economy –govt. business
,personal
7. Expenditure for defense
 Economic analysis..
8. Disposable personal income and per
capital real GNP
9.Surveys of intentions of people
10Economy in which economic decisions
are made ( decentralized / centralized)
12. Money supply
11.Cyclical indicators – timing and
economic process
The cyclical timing classification
( Developed by Bureau of Economic
Analysis , USA)
1. leading

2. Roughly coincident

3.Lagging
 1.Leading indicators

The leading indicators are those time

series of data that historically reach their
high points ( peaks) or their low points
( troughs) in advance of total economic
activity
2. Roughly coincident indicators
RCI reach their peaks or troughs at
approximately the same time as the
economy

3. Lagging indicators
LI reach their turning points after the
economy has already reached its own
Indexes of economic indicators – composite index of leading indicators

1.Average weekly hours of production workers

( manufacturing)
2.Average weekly initial claims for
unemployment insurance
3.Manaufactures new orders ( consumer goods
and material industries)
4.Vendor performance
5.Contracts and orders for plant and equipment
6.New private housing units authorized by local
building permits
Composite leading indicators..
7.Change in manufactures’ unfilled orders
( durable goods industries)
8.Change in sensitive material prices
9.Stock prices, 500 common stocks
10Money supply ( M2)
11.Index of consumer expectations
2.Composite index of coincident
indicators
1. Employees on nonagricultural payrolls
2.Personal income less transfer payments
3.Industrial Production
4.Manufacturing and trade sales
 3. Composite index of lagging
indicators
1.Average duration of unemployment
2.Ratio of trade inventories to sales
3.Change in index of labor cost per unit of output
4.Average prime rate charged by banks
5.Commercial and industrial loans outstanding
6.Ratio of consumer installment credit
outstanding to personal income
7.Change in consumer price index for services
 The Indicator Approach
The indicator approach is most valuable in
suggesting the direction of a change in
aggregate economic activity ; however ,it
tells us nothing of the magnitude or
duration of the change
To compound, the difficulties, outright
errors frequently occur in the data