Each month government agencies like the Departments of Labor and Commerce, and private institutions publish a variety reports addressing leading, lagging, and coincident indicators.
1. Lagging indicators, like the unemployment rate and corporate profits, are of little help in forecasting since they change only after the economy begins to shift.
2. Coincident indicators, like personal income and industrial production that move simultaneously with the business cycle are equally unhelpful in forecasting the future.
3. Leading indicators that move in advance of changes in the business cycle are more helpful. Housing starts usually start to increase several months before the emergence of full recovery, and tail off several months before a recession begins.
Once again a broad index comes to the rescue. As a manager, you should maintain a close watch on the Conference Board’s Composition Index of Leading Economic Indicators. The index charts the movements of 10 individual leading indicators. Included in this list is the index of consumer expectations, new orders for capital goods, and changes in the money supply. These are chosen because they relate directly or indirectly to changes in fiscal and monetary policy as well as components of the GDP equation. When the Composition Index has trended down 3 to 5 consecutive months, it generally signals a coming recession. A similar sustained upturn of the Index generally indicates economic recovery and expansion.
THE YIELD CURVE
The yield curve measures the spread between short and long-term interest rates. This curve can take on one of three shapes: normal, inverted, or steep. The normal yield curve typically occurs when investors in bonds expect the economy to expan...
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...perceived trough of the business cycle in order to complete your new production or retailing facilities in time for the recovery.
Mergers, Acquisitions, and Divestitures
While you may have adopted a strategy of expansion through mergers, acquisitions, or policies favoring divestiture of unprofitable or uncomplimentary divisions, macroeconomic considerations can help you decide when to execute your strategy. Stock prices are typically at their highest toward the peak of economic expansion, during the late cycle bull market; and begin falling during the bearish phase of the market cycle that anticipates the downturn. If you have the liquidity, or can borrow the cash, you may want to pursue a countercyclical strategy, waiting for stock prices to plummet during the recession, and selling your "dogs" at a premium as prices move through the bull market toward the peak.
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