Lagging Indicators Analysis
Leading Indicators is a classification of indicators which are used to predict future economic trend. In contrast, lagging indicators respond to events and are used to confirm a pattern that has developed.
A few of the impacts of these indicators on businesses are highlighted below: 1. Forecasts the Cost of Capital: Low interest rates typically signal a problem in the economy while higher interest rates suggest expansion and growth. Additionally, for business, as interest rates are generally the cost of capital, higher interest rates will increase costs and vise-versa.
2. Confirms the State of the Economy so that Producers Can Adapt Production: High unemployment, a lagging indicator, confirms that the economy …show more content…
Changes Stock Prices: Shareholder view a business with high return on investment as a secure business with lower risks. Due to such, they will be willing to buy shares at a higher price.
3. Guides Decision-making: Although ROI may not be the most effective way of measuring the return of all projects such as those which have multilateral effects, it is definitely a source of previous outcomes of similar decisions which the business has access to. Hence, future decisions may be guided by previous investments for accurate expectation of returns.
5. Chicago PMI (Purchasing Managers Index):
The Chicago PMI (ISM-Chicago Business Barometer) measures the performance of the manufacturing and non-manufacturing sector in the Chicago region which somewhat mirror the US on the whole. This index takes into account production, new orders, order backlog, employment and supplier deliveries. Figure 3 below highlights the trend in the Chicago PMI in the last five years. In the graph, a reading above 50 indicates an expansion; below 50 represents a contraction; while 50 indicates no change.
. Figure 3: Change in the Chicago Purchasing Mangers Index from 2011 to 2016 as according to the data provided by ISM Chicago …show more content…
Bureau of Economic Analysis.
A few of the impacts of GDP on businesses are highlighted below:
1. Motivates Employment Decisions: A decrease in GDP is a sign that unemployment levels will rise in the future whereas an increase in GDP is a sign that unemployment levels will fall. This is because as producers are produce at lower levels, they tend to use less labor in an effort to reduce idleness and maintain profit margins.
2. Dictates Investment Decision: Especially in the global environment, investors and businesses seek to invest in economies that are healthy and growing in contrast to those in recessions as return of investments are higher in growing economies.
3. Stock Market: As GDP is a growth indicator, changes in it will respectively impact the growth potential of companies. As such, a contraction in GDP may lower stock prices or