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U.S Economic and Productivity Analysis TutorialIn a complex economy, such as that of the United States, there are many variables at work. You need to interpet what you read. That, however, can be tricky since there are far too many factors for you to make easy judgements. The economy is a very complex system and you don't know which variable will be the economic driver that is going to rule the day. Many managers do regularly review government reports of economic conditions, but often these reports are disjointed, politically manipulated and fail to give the reader an adequate overview of economic directions. At best, it gives a very blurry picture. Many mainstream economists do not recognize the beginning of a recession because they rely on quarterly data and leading indicators which will probably be revised in the future. Also, the way the government calculates its numbers can have some odd effects every now and then. These are just some of the reasons why we prefer to use year to year data. This data is more stable, less subject to future revision, and in our opinion gives a more accurate picture of the economy. Government reports are usually the last to flash red. By the time they do it is too late to strategically do anything about it and most of the economic harm has already occurred. Typically, a recession is declared nine months after its start. This leaves you no time to position yourself and your company for the economic downturn. The purpose of this section is to give you sufficient advance warning of upcoming changes in the U. S. economy so that you can effectively prepare and take full advantage of this knowledge (we also try to circumvent or at least reduce the effects of political manipulations). Underestimating a downturn could severely damage or bankrupt your company. Overestimating the duration of a downturn can leave a business ill-prepared to take greatest advantage of an economic rebound. However to do this sucessfully, you must first formulate a plan of action for each scenario and then be ready to implement these plans when necessary. This can help you survive and even possibly thrive during any downturn. In our opinion, advanced warnings can best be gotten by following the relationship between the economy's level of productivity and accompanying changes in Gross Domestic Product (GDP). Both productivity and GDP are the Swiss Army knives of economics. Together they combine the effects of most factors that determine economic trends. ProductivityOf the two, the fundamental driver of economic growth and profits is productivity. Productivity measures real output as a function of production labor. Its value is the result of the synergistic effects of many factors. They include technology changes, capital investments, output, cost of energy, cost of materials, capacity utilization, managerial and workforce skills. All of which do affect the economy in their own ways. Productivity is a good barometer of a country's economic health because it does encompasses all of these factors.Gross Domestic ProductGDP is the value of all goods and services produced nationally, including those meant for export. Imports are subtracted from exports to obtain a trade balance figure called "net exports." A positive "net exports" value is an enhancement to GDP and a negative value is a drain on the economy.Productivity vs. GDPThe relationship between productivity, Gross Domestic Product and economic health is quite simple but strong. GDP is an "all in one" tool that measures the value of all goods and services. Productivity is an "all in one" tool that measures the cost of producing that value. The difference between the two is the key to earnings outlook. When productivity increases more rapidly than GDP, the average cost of producing all of the nation's goods and services decrease and average profits increase. When GDP increases more rapidly than productivity, the economy is still growing but at the cost of declining unit profits. When GDP is decreasing the country is heading for or in a recession mitigated by productivity. When both productivity and GDP decline simultaneously, the country is in a economic recession. The steeper the decline, the deeper the recession becomes. The ideal situation would be to experience a steady growth in both.What should you look for?You shouldn't be too concerned with the absolute values of each. Changes are more important. Government releases tend to emphasize quarterly changes. These estimates are meant to help those more focused on short term relationships. Although there are times that quarterly reports need to be reviewed, they can be too volatile for long term projections. You should pay more attention to their year to year quarterly changes because these are the variations that indicate whether the economy is growing, declining or stagnating over the long term. In addition year to year changes will factor in seasonal considerations and adjustments.Look for changes in the ratio of productivity to Gross Domestic Product for early signs of a shifting economic climate. Tracking this data will allow you to see major economic shifts before they reach your bottom line. Use this knowledge to formulate appropriate actions for you and your company to take. For example, signs of an economic slowdown may warrant a realignment of an imbalance in production schedules and inventory levels. Much of the initial opportunities for increasing market share when coming out of a recession go to companies that are able to ramp up the fastest. An increasingly optimistic outlook may call for an up tick in production to meet anticipated demand. Doing so may put you in a position to increase your market share by fulfilling the demand that your competitor can not. He or she may wait until the economy has already started to accelerate to ramp up production and may not be prepared to fill these orders. However, you can be! Below is a description of a chart derived from GDP data reported by the United States Bureau of Economic Analysis and productivity data from the U. S. Bureau of Labor Statistics. This chart appears on the webpage associated with this explanation. The graph and accompanying table shows Year to Quarter figures that are adjusted monthly to reflect the latest "Advance", "Preliminary", and "Final" data issued by the two departments. The chart is divided into four quadrants representing four economic phases: Quadrant I-Indicates a positive economy. An upward trend depicts an expanding economic outlook. Although still in a positive economic environment, a downward trend indicates a slowing economy and cost pressures that might signal early signs of an approaching recession. This is the time for you to start preparing 1st and 2nd stage recession strategies to deal with potential consequences. Stage one planning outlines the steps that should to be implemented with the assumption of a mild business contraction. This could be as simple as a realignment of inventory. Stage two assumes a more severe economic downturn and requires the implementation of more austere measures to compensate and prepare for the future events. Quadrant II-First Stage: Negative growth in GDP mitigated by a positive increase in productivity. Due to the fact that productivity is still high, recession effects remain mild. However, this is an indication that costs may be on the verge of increasing and profitability decreasing. Second Stage: Although still positive, productivity exhibits a definite and well defined contraction in growth. This is an indication of a deteriorating economy. When the data enters Quadrant II, you should implement 1st stage plans that were prepared while the economy was still in Quadrant I. Ready 2nd stage plans for implementation should the economy worsen. Quadrant III-Data reflects a deep recession where both GDP and productivity are contracting. This is typical of U.S. recessions. By this time you should have stage 2 recession plans fully implemented. Quadrant IV-Improving or deteriorating economic outlook: GDP has turned positive indicating an economy that is expanding. However, productivity has not. Level or downward trends may indicate that you can expect a worsening economy with a period of profit squeezes until the economy changes directions. An upward trend presage improving profits during the economic recovery. If the trend is upward, start preparations for a resumption of economic expansion and implement those plans when the economic data returns to Quadrant I. Industry and Location Specific DataThe information presented here gives a “macro-economic” outlook. During any economic phase there are industries that thrive while others don’t. The same can be said about various localities. The U.S. Bureau of Economic Analysis publishes both industry wide and state wide GDP data. You may want to use this information to refine your analysis further and develop your own industry/company specific charts. Since no two companies are truly alike and each industry is different, we strongly recommend that you do so. Many of these government reports can be accessed through the homepage of this site. Also, a website entitled MetricMash accesses public databases and allows you to slice and dice an assortment of timely economic information. You can compare upto four trends in a single plot. We suggest that you use this site to develop your own specific analysis!Remember the old saying: "Knowledge is Power". Well power can be turned into profits! |
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