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Economic Analysis.docx

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University of Manitoba
Management Info. Systems
MIS 4500
Pourang Irani

Economic Analysis:  Business cycle analysis: short-term inventory cycle (2-4 yrs); longer-term business cycle (9-11 years) o chief measurements of economic activity:  GDP: consumption, investment, change in inventories, gov’t spending and exports less imports  output gap: difference b/w GDP trend (potential GDP) and actual; affects inflation  recession: two successive quarterly GDP declines o inventory cycle: caused by companies trying to keep inventories at desired levels as expected level of sales changes  up phase: businesses confident and increase production  down phase: business cuts back production to reduce inventories  inventory / sales ratio: when moved down, economy likely to be strong in next few quarters, as businesses try to rebuild; when ratio moved sharply up, period of economic weakness can be expected  however, downward trend from improved technology (“just in time” inventory management); but more visibility so sharper changes o business cycle: 1. initial recovery; 2. early upswing; 3. late upswing; 4. slowdown; 5. recession  1. initial recovery: short phase (few months) when economy picks up from slowdown; business confidence rising, though consumer confidence still low from unemployment; stimulatory economic policies; usually upswing in inventory cycle; inflation still falling and output gap still large  gov’t bond yields may still be falling (matching declining inflation) or bottoming;  stock market may rise sharply, w/ demand for cyclical and riskier assets  2. Early upswing (1 yr to several years): confidence up and momentum in economic activity, w/o overheating or sharply higher inflation; consumers prepared to borrow and spend; businesses build inventories and investment, w/ higher sales and increased capacity use; profits rise from lower unit costs;  short rates starting to rise as stimulus withdrawn;  longer bond yields stable or rising  stocks still trending up  3. Late upswing: output gap has closed and danger of overheating; high confidence and low unemployment; high growth; inflation starts to pick up w/ accelerating wages  interest rates rising from tighter monetary policy; pressure on credit markets from heavy borrowing; central banks aiming for soft landing  bond yields rising  stock markets rising still but nervously; volatile  4. Slowdown (few months to 1 year): economy slowing from rising interest rates; vulnerable to shock; business confidence wavers; inflation still rising; businesses reduce inventories (inventory correction);  short-term interest rates are high and rising to peak  bonds top out at first sign of slowing economy, then rally sharply (yields fall)  yield curve inverts  stock market falls, w/ utilities and financial services performing best  5. Recession (6 mos to yr): large inventory pullback and sometimes large decline in business investment; consumers reduce big-ticket expenses; upon recession confirmation, monetary policy cautiously eased; consumer and business confidence decline; profits drop sharply; financial system may be stressed by bad debts, so cautious lending; major bankruptcies and uncovered fraud; maybe financial crisis; maybe quickly risking unemployment  short-term interest rates and bond yields drop;  stock market begins to rise at later stages (b/f recovery)  trends affecting business cycle:  growing China  aging populations  deregulation  oil crises  financial crisescentral bank orthodoxy:  central bank policymaking must be independent so monetary policy not too loose  central bank should have inflation target for discipline and to set expectations  central banks should use monetary policy to prevent overheating or recession  deflation: 1. undermines debt-financed investments (resulting in panicked asset sales); 2. limits ability of central bank to conduct monetary policy (liquidity trap)  inflation should result in higher profits and higher stock prices, but too high results in efforts to cool down the economy, resulting in lower stock prices o Market Expectations and the Business Cycle:
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