- MemberJanuary 23, 2022 at 4:40 pm
As we discuss macroeconomic issues and identify problems related to the
economic meltdown, what is your view on the impact of macroeconomic
variables on the business decision-making environment. Are macroeconomic
variables a good indicator of business performance?
Tracking of macroeconomic variables is an important element in business decisions as overall economic activity, economic policies (industrial policy, trade
policy, monetary policy, fiscal policy), inflation affects the business. Business depends on economic growth, any changes in overall economic environment affects the business. When the economy’s growth is slowing, demand will be reduced and the business will have to make the necessary adjustments to its production and operations. As for Inflation, we have Demand-Pull Inflation and Cost-Push Inflation. This is what we are seeing now as economy reopens and recover. The demand for goods has now increased, and if it outweigh supply, price will go up. Due to Covid, the cost of doing business increases due to reasons such as tight supply of workers and insufficient shipping containers. These scenarios will need constant business attention to continuously monitor the latest situation and act accordingly such as raising the selling price to accommodate for their increased cost of goods and overhead costs. When inflation is high, which in turn generates higher interest rate, businesses will need to reconsider their borrowings structure and overall financial planning.
Macroeconomic variables such as unemployment rate and corporation tax rate are beyond the control of an organization. History has shown strong correlations between economic growth (GDP) and corporate profit growth. However, determining
whether a specific company may grow its earnings based on one indicator
of GDP is nearly impossible (https://www.investopedia.com/terms/e/economic_indicator.asp).
One of the top leading indicators used is the stock market’s performance due to the reason that stock prices factor in forward-looking performance. Hence, the stock market can provide some indication of the economy’s direction, but only if earnings estimates are accurate. There is a risk in using this indicator as financial estimates may not materialize, which will then cause the stock price to decline.
Businesses may rely on leading macroeconomic indicators as one of their decision tool in predicting business cycles and to analyze whether expansions or
contractions needs to be planned in the near future. Purchasing Manager’s Index (PMI) is one of the most followed economic indicators because of its strong correlation with GDP. The information collected can be used to forecast the overall business
confidence and helps determine if it shows an
expansionary or contractionary outlook.
If the economy is not doing well (eg, recession), GDP decreases or unemployment rate increases. In turn, businesses will foresee less optimistic performance outlook. When unemployment rate increases, businesses will also expect lower demand of their goods, which will negatively impact their performance.
Hence, businesses may utilize macroeconomics data as a tool in their forecast but it will not be a direct indicator of their performance. In summary, not all macroeconomics variables are indicators of business performance. The level and degree of correlation may vary and it is also dependent on other factors as well, such as size of companies, industries, type of goods and such.