Essay on "Macroeconomic Forecast"

Essay 4 pages (1528 words) Sources: 5

[EXCERPT] . . . .

Macroeconomic Forecast

Over the last two years the U.S. economy has went into a severe contraction, as the total GDP growth declined 6% and the unemployment rate shot up to 10%.

This caused the economy to experience its slowest growth since the recession of the 1980 to 1982. However, despite the dire news, the economy appears to be showing some signs of forming a bottom in the economic cycle. As result, many economists and analysts have been starting to revise their economic forecasts upward. To determine if this is in fact a bottom that is taking place requires that you examine a number of different factors including: corporate earnings, the performance of the equity markets and the ISM surveys of the manufacturing / service sectors. This will provide the greatest insights as to what are the underlying trends that are occurring, which help shed light on how the economy will be performing six the twelve months down the road.

To most accurately determine what is taking place with the economy requires that you use forward looking indicators. These are indicators that have historically shown to look at where the economy is headed in the future vs. The past. The problem with the world of investing is: many people will often look at the backward looking indicators to determine their overall views on the economy (such as unemployment). When such an approach is taken, these people will often miss the inevitable bottoms that will form when economic conditions are changing. This is when you have the greatest opportunity for the largest profit potential as the economic risks have mitigated, yet the general public is still skeptical. Currently, the U.S. economy is going through a similar situation as the general public is hesitant about future economic activity. However, when you look at the forward looking economic indicators they show that the economy started the process of a bottom in the middle of 2009.

Forward Looking Indicators

When looking at the different forward looking indicators of: corporate earnings, the performance of the equity markets and the ISM surveys of the manufacturing / service sectors, it is clear that there are correlations between all of them. Where, the underlying trends are indicating that the economy is bottomed and is going through a period of slow economic growth over the next six to twelve months. When looking at corporate earnings, it is clear that there was a clear decline between 2007 and 2009 of 27.73%.

However, since the middle of 2009, corporate earnings have been consistently rising. An example of this can be seen with the S & P. 500 companies reporting a rise of 30% in total earnings since the middle of 2009.

This includes some of the more cyclical companies including Intel and Ford. What this shows is that as far as earnings are concerned the hemorrhaging has stopped and corporations are once again able to show consistent earnings growth over the last two quarters.

When examining the equity markets, a similar trend is occurring, where it bottomed in March 2009 and began to consistently move higher. An example of this can be seen with the Dow Jones Industrial Average, which saw the index decline to 6,500. In the July to August time frame, is when the average would form a long-term bottom breaking through the 10 day, 50 day and 200 day moving averages.

This is significant because when the markets decline to such a level and then break through the moving averages; it is a sign that sellers are becoming exhausted. The moving averages are important because they are the average price over a certain period of time. When you see them break through the short-term moving averages (such as the 10 day) and the long-term moving averages (such as the 200 day). This is an indication that the price trends of the markets are improving. Historically, this has been used to identify major market bottoms such as 1974 or 1987. This is significant because the equity markets are always looking out six to twelve months down the road. When you see these markets form a bottom and significantly break through their moving averages, it is a sign that the old trend has changed and new one has formed. In this case, it means that one can effectively argue that the bear market is over.

Upon looking at the ISM surveys of the manufacturing / service sectors, it is obvious that they have been confirming that the economy has bottomed. These surveys are important because they discuss with manufacturers and businesses about what their plans are for the future. Where, a reading above 50 is a sign that either industry is in an expansion. After you apply both numbers to the economy, they are showing that some type of bottom took place in the middle of 2009. Evidence of this can be seen in the service sector, when the index posted a reading of 55.4%. This is the third consecutive month that the index has been showing reading above 50.

The manufacturing sector has been showing similar signs of strength, with the index post a reading of 55.1 for March.

This is the eighth straight month of consecutive growth for the sector. When, you put these two numbers together, this shows that the largest sectors of the economy are once again showing consistent signs of growth. This underscores the fact that the overall inventory levels are low and demand is slowly starting to increase in the U.S. economy.

Clearly, the correlation of the different indicators / tools highlights how the U.S. economy has bottomed from one of the worst recessions since the end of World War II. This is significant because it indicates that the economy is once again growing at a slow pace. What will more than likely happen over the next six to twelve months is: a jobless recovery will occur. This is when the economy is in its earliest signs of improvement. Yet, the overall effects will not be felt for several months down the road, as the levels of unemployment and memories of the severe economic contraction are making the general public hesitant. It is this hesitancy that will help fuel the jobless recovery, where people will take a wait and see approach when it comes to the economy. However, once this initial stage of slow growth has been established, it would not be surprising to see the unemployment rate begin to see consistent declines. The reason why is because there will be lag from any kind of economic recovery taking place and employers actually hiring more people. Once employers see that the economy has stabilized, they will begin to resume hiring once again. It is at this point that a full economic recovery will take place. Since the economy is slightly above the trough of the business cycle, means that 2010 will be a year that economic conditions will improve. As a result, it would not be surprising to see the unemployment rate begin to see consistent declines towards the later half of the year and into 2011. At which point, the economists will officially declare the current recession over and the psychology will slowly begin to change. These factors are dependent upon nothing unexpected happening during this time such as: a major terrorist attack or environmental events which could cause disruptions. If any one of these scenarios occurs, then it could mean that any kind of economic forecast is inaccurate because of the changes that have taken place. Therefore, given the best available information, the economy will go through a period of slow growth for most of 2010. Followed by a period when economic conditions will improve dramatically.

Bibliography

"S & P. Earnings 1960 to Current." NYU. 2010. Web 19 Apr. 2010.

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