Economic Forecasting

ECONOMIC FORECASTING:

The common techniques used are analysis of key economic indicators, diffusion index, surveys and econometric model building. These techniques help him to decide the right time to incest and the type of security he has to purchase i.e. stocks or bonds or some combination of stocks and bonds.

ECONOMIC INDICATORS

The economic indicators are statistics about the economy that indicate the present status, progress or slow down of the economy. They are capital investment, business profits, money supply, GNP, interest rate, unemployment rate, etc. The economic indicators are grouped into leading, coincidental and lagging indicators. The indicators are selected on the following criteria

∑    Economic significance

∑    Statistical adequacy

∑    Timing

∑    Conformity

The leading indicators:

The leading indicators indicate what is going to happen in the economy. It helps the investor to predict the path of the economy. The popular leading indicators are the fiscal policy, monetary policy, productivity, rainfall, capital investment and the stock indices. The fiscal policy shows what the government aims at and the fiscal deficit or surplus has an effect on the economy.

The coincidental indicators:

The coincidental indicators indicate what the economy is. The coincidental indicators are gross national product, industrial production, interest rates and reserve funds. GDP is the aggregate amount of goods and services produced in the national economy. The gap between the budgeted GDP and the actual GDP attained indicates the present situation. If there is a large gap between the actual growth and potential growth, the economy is slowing down. Low corporate profits and industrial production show that the economy is hit by recession.

The lagging indicators:

The changes that are occurring in the leading and coincidental indicators are reflected in the lagging indicators. Lagging indicators are identified as unemployment rate, consumer price index and flow of foreign funds. These leading, coincidental and lagging indicators provide an insight into the economy s current and future position.

DIFFUSION INDEX

Diffusion index is a composite or consensus index. The diffusion index consists of leading, coincidental and lagging indicators. This type of index has been constructed by the National Bureau of Economic Research in USA. But the diffusion index is complex in nature to calculate and the irregular movements that occur in individual indicators cannot be completely eliminated.

ECONOMETRIC MODEL BUILDING

For model building several economic variables are taken into consideration. The assumptions underlying the analysis are specified. The relationship between the independent and dependent variables is given mathematically. While using the model, the analyst has to think clearly all the inter-relationship between the variables. When these inter-relationships are specified, he can forecast not only the direction but also the magnitude. But his prediction depends on his understanding of economic theory and the assumptions on which the model had been built. The models mostly use simultaneous equations.

Factors affecting Economic Forecasting

¸ GDP ( Gross Domestic Product)

¸ Inflation

¸ Interest rates

¸ Government revenue, expenditure and deficits

¸ Exchange rates

¸ Infrastructure

¸ Monsoon

¸ Economic and political stability

STOCK INVESTMENT DECISION Look for a stable company : financially strong

Look for a company that can grow and prosper: Profit and success

Look for a company that has good management and corporate structure: Right people in right direction