Describe why leading indicators are relevant in developing forecasts for a business. Would your assumptions change if the leading indicators seemed to show a pending downturn? How might this affect your plans for capital expenditures?
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1. Stock Market
Though the stock market is not the most important indicator, it’s the one that most people look to first. Because stock prices are based in part on what companies are expected to earn, the market can indicate the economy’s direction if earnings estimates are accurate.
2. Manufacturing Activity
Manufacturing activity is another indicator of the state of the economy. This influences the GDP (gross domestic product) strongly; an increase in which suggests more demand for consumer goods and, in turn, a healthy economy.
3. Inventory Levels
High inventory levels can reflect two very different things: either that demand for inventory is expected to increase or that there is a current lack of demand.
4. Retail Sales
Retail sales are particularly important metrics and function hand in hand with inventory levels and manufacturing activity. Most importantly, strong retail sales directly increase GDP, which also strengthens the home currency. When sales improve, companies can hire more employees to sell and manufacture more product, which in turn puts more money back in the pockets of consumers.
5. Building Permits
Building permits offer foresight into future real estate supply levels. A high volume indicates the construction industry will be active, which forecasts more jobs and, again, an increase in GDP.
6. Housing Market
A decline in housing prices can suggest that supply exceeds demand, that existing prices are unaffordable, and/or that housing prices are inflated and need to correct as a result of a housing bubble.
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Jun 14th, 2015
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