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Economic Indicators: their role in business finance

An economy can be explained to be including every exchange of money that takes place in a city, state, nation or a group of nations. Every business operates in a particular economy and is deeply connected with that economy. Hence, business follows the economic news. Business can impact the economy. In the 1970s, many businesses moved their head offices outside New York, which deeply hurt the city’s economy. Secondly, economy too has a far reaching effect on the businesses. The concepts of unemployment, inflation, recessions, recoveries, money demand and supply, fiscal and monetary policies etc have a strong influence on the business.

economy-indicators

In order to manage your business in different economic conditions, you need to know and understand certain basic economic indicators and how they impact your business. The economists, after analyzing the publicly available data published by the governmental bodies, have come to a conclusion that there are certain ‘numbers’ which point to the current and future state of the economy.

Following are the key economic indicators one need to know in order to make meaningful decisions in business:

  1. Growth rate in the economy
  2. Interest rates prevailing in the economy
  3. Inflationary and deflationary trends
  4. Employment levels
  5. Consumer confidence
  6. Housing sales
  7. Retail and car sales
  8. Capital market

(1)  Growth rate in the economy:- The economy as a whole is measured in terms of Gross Domestic Product (GDP). GDP is nothing but the sum total of total spending by the consumers, total investments in the business, total spending by the government and net export (exports less imports). When the GDP grows, it can be said that the economy is growing and when it falls, the economy is contracting.

(2)  Interest rates prevailing in the economy:- Interest is nothing but the cost of the money.  Federal funds rate and discount rate are the key interest rates since the Federal Reserve can directly set them. A business should continuously monitor the interest rates since it helps them to take decisions with respect to taking loans for their business.

(3)  Inflationary and deflationary trends:- Inflation refers to the  overall increase in the price of the entire basket of goods and services. This happens when the demand exceeds supply. Also, a sudden increase in growth rate in the GDP can result in inflationary trends. The main indicators of inflation/deflation are Consumer Price Index (CPI) and Producer Price Index (PPI). The businesses can benefit by tracking these indicators since vital production and marketing decisions depends on these two indices.

(4)  Employment levels:- Employment in an economy is generally measured in terms of the “unemployment” levels. This rate measures the percentage of people in the work force who are out of work. The concept ‘work force’ has however not been explained clearly. Hence, long-term unemployed people are excluded from the computation of unemployment levels. It must be remembered that although low unemployment is a good thing, it puts business under pressure to increase wage rates. Hence business must regularly monitor the general levels of unemployment in the economy.

(5)  Consumer Confidence:- Businesses must look at the consumer confidence index reported by government agencies in order to obtain an idea of consumer psychology. Consumers  are sampled and asked as to how they perceive the economy in the coming days and what would be their key decisions with respect to their own jobs, businesses etc.

(6)  Housing Sales:- Housing sales represents a chain of major purchases. Hence, they indicate the strength of the economy. A high housing sale indicate a robust economy which decreasing sales indicate a weakening economy.

(7)  Retail and car sales:- A strong demand for retail and auto sales indicates consumer willingness to spend. It indicates a booming economy. It is said that an increasing trend of car purchases show that the consumers have a strong faith in the economy.

(8)  Capital markets:- Whether the business is small or not, it always pays to watch the Wall Street.  Stock market is more of a psychological barometer of the performance of the nation’s economy. A rising stock market index indicates a recovery whereas a falling index indicated a recession. However, it may be remembered that stock markets are a ‘lagging’ indicator of nation’s economy and not ‘leading’ one.

 If the businesses are judicious in their study of the economic indicators, they can take many vital decisions for the long term survival of their businesses.

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About

Sarvesh Mopkar is a Chartered Accountant by profession. Since childhood he is naturally drawn to spirituality and occult sciences and his mission is to bring out in front of the world the most genuine, practical and authentic people in their respective fields. He can be contacted at his email sarveshmopkar@yahoo.co.in, cell: +91 98222 43867 (INDIA).

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Devang Vibhakar
Devang Vibhakar
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