© 2000 John Petroff
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© 2000 John Petroff |
Since all industries are affected by the business cycle, an analyst must have a clear idea of what will be the state of the economy in the coming year or two. Some industries are especially sensitive to changes in disposable income of consumers, or even minor slowdown in the rate of growth (as evident by the nose dive of international travel in 1994 when the growth rate of the economy was merely resting at 3.4%). When choosing projects with cash flows extending over several years, a forecast becomes more challenging because of the longer time horizon. Even more crucial is a prediction of turning point for those who trade in bonds and stocks. Capital markets cycles precede economic cycles: to avoid capital losses, an investor must sell cyclical stocks before a bearish market pushes all stock prices down, and must buy before a bullish market lifts all stock prices.
As suggested earlier in the introduction to this chapter, economic forecasts are many and varied. An analyst may not need to formulate an entirely original prediction. Instead understanding how different forecasts are made and incorporating this knowledge in a comprehensive vision of future economic conditions is still plenty of work.
See review questions Q-15C.1 through Q-15C.4.
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