1. Business Forecasting Chapter 3 The Macroeconomy and Business Forecasts

2. Chapter Topics Introduction Cyclical Linkages and Forecasting Phases of Business Cycles Peaks Recession Trough Recovery Historical events of Business Cycles

3. Chapter Topics Macroeconomic Models and Forecasting Use of Macroeconomic Models at Industry and Firm Level

4. Business Cycles Peak Refers to economic condition at which business activity has reached a temporary maximum. During this phase the economy shows full employment and the level of real output is at, or very close to, its capacity. There is expectation of a price rise at this phase.

5. Business Cycles Recession A decline in output, income, employment, and trade lasting more than 6 months. Often a widespread contraction of the business in many sectors of the economy. Prices may not decline (stickiness) as fast unless there is a prolonged recession or depression.

6. Business Cycles Trough Output and employment “bottom out” at their lowest level. Duration of the trough may be short or long. Recovery Output and employment surge toward full employment. Price level may begin to rise before full employment is reached.

7. Historical Events and their impact on Business Cycles Growth Rate for the Various Macroeconomic Indicators Series1886–19161920–19401948–1997 % % % Industrial Production6.2 16.0 5.0 GNP3.0 7.1 2.5 Commodity Output5.2 9.0 4.9 Unemployment Rate1.4 1.1

8. Historical Events and their impact on Business Cycles

10. Macroeconomic Models and Forecasting Many variables interact to shape the economy. Forecasters use necessary tools to observe the interrelationships in the overall economy. Macroeconomic models are general equilibrium models. In building macroeconomic models for forecasting, we depend on theory and statistical techniques.

11. Use of Macroeconomic Models at the Industry and Firm Level

12. Chapter Summary Business decisions are made in the context of the overall economy. Long-term trends, seasonal patterns, cyclical movements, and irregular factors play an important role in the overall economy. Understanding the various phases of business cycles is helpful to forecasters.