Macroeconomic and Industry Analysis

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• Macroeconomic and Industry Analysis
• (chapter 12 online)

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Dimensions of the Economy

• As the economy goes, so goes the businesses and
  their stock
• Macroeconomic Analysis
• aggregate economic activity
• Gross Domestic Product
• Interest rates
• Consumer spending, consumer income
• employment
• Microeconomic Environment
• industry, firm, plant, or product level
• Industry specific regulation
• Material prices (aluminum, wheat, oil, etc.)

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Purpose of Economic Analysis

• Understand the impact of recent economic trends
  on company you need to value
• Develop a perspective on how future economic
  trends will affect profitability and risk of
  subject company
• - current stage of the business cycle
• - economic growth expectations
• - supply and demand conditions
• - inflation expectations
• - investment and credit conditions
• - political and regulatory events

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Forces Driving the Economy

• 1) Demographics
• Baby boom generation
• Born 1946 through 1964

• Significant impact on society
• spending
• saving
• working/retirement
• housing

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• 2) Productivity
• The ability to produce more products and services
  with the same number of people.
• When productivity growth is robust, the standard
  of living increases.
• Gains are often made from advances in technology
• Computers, Internet, etc.

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Business Cycles

• Pattern of economic recession and expansion
• Periods of economic expansion are followed by
  periods of contractions
• Recession
• 2 or more concessive quarters of contraction
• Higher unemployment
• Restricted credit
• Reduced output
• Depression
• Severe recession (no official definition)

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Economic Indicators

• Data series that successfully describe the
  pattern of projected, current, or past economic
  activity.
• Leading indicators
• Money Supply, building permits, manufacturers
  new orders, initial claims for unemployment
• Lagging Indicators
• Consumer price index, inventories, labor cost
• Coincident Indicators
• Industrial production, personal income, payrolls

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Competitive Environment

• Industrys market structure
• Current stage of the industry life cycle
• How cyclical it is
• Number and size of competitors
• Monopoly/Oligopoly
• Industry sales and profitability
• RD and technology
• Competitive advantage

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Michael Porter characterizes the competitive
environment -- five forces

• Rivalry among existing competitors
• Threat of new entrants
• Pressure from substitute products
• Bargaining power of customers
• Bargaining power of suppliers