Economic Analysis

• Author: Ralph Wray
• Pages: 215-218

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Economic forces affect decisions made in personal business activities, as well as within business organizations, government entities, and nonprofit organizations. Changes in economic conditions affect and are affected by supply and demand, strength of buying power and the willingness to spend, and the intensity of competitive

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efforts. These changes propel fluctuations in the overall state of the economy and influence courses of action and the timeliness of actions. Nonprofit organizations, for example, may find that fund-raising efforts fueled by personal contributions are more successful during periods of economic prosperity. A first-time home buyer may be more inclined to purchase a house when interest rates are low and prices are likely to increase in future months. Since decision makers cannot control economic forces, a concerted effort should be made to monitor such forces. All business executives know that it is important to gain some idea of what general business conditions will be in the months or years ahead. Fortunately, certain economic indicators or indices enable decision makers to forecast oncoming changes in economic forces. Since both individuals and organizations operate in a dynamic economic environment, losing sight of what is going on can be disastrous for either.

THE BUSINESS CYCLE

Fluctuations in the economy tend to follow a general pattern that is commonly referred to as the business cycle. The business cycle, in the traditional view, consists of four stages—each of which may vary in terms of duration and intensity. The four stages are prosperity, recession, depression, and recovery.

Up-to-date charts, tabulations, and measures of relevant economic indicators are published by the Bureau of the Census in the monthly report, Business Cycle Developments. Economic indicators are predictors or gauges that signal cyclical movement of the economy within each stage of the business cycle or from one stage to another. A few examples of economic indicators include average workweek in manufacturing, new building permits for private housing, new orders for durable goods, and changes in consumer installment debt. While various government agencies collect and report monthly, quarterly, semi-annual, and annual measures of numerous economic indicators, economists representing various industries and other decision makers analyze and interpret the data.

Timing is everything when it comes to making good business cycle-sensitive decisions. Just as a truck driver starts braking before reaching an intersection with a flashing red light, decision makers need to make appropriate plans before the business cycle passes from one stage to the next. Prosperity, a period characterized by low unemployment and relatively high incomes, is followed by recession, a period during which unemployment rises and total buying power declines, leading to decreased spending by business firms and consumers. A production manager should make...