Comprehensive Forecast for a New Building Hardware Store

Categories: EconomicsEconomy

Based on the readings of Everyday Economic Statistics, a primary text for Managerial Economics course, a detailed plan of indicators and web resources to develop a new start up hardware store will be discussed in this essay. The indicators used in this essay will scan for total output and income, economic production and growth, investment and capital expenditures, total employment and consumer spending (Clayton, Giesbrecht & Guo). Specific economic indicators will provide a forecast enabling sound decision-making in order to launch a successful business.

Purchasing managers’ index (PMI), complied by the Institute of Supply Management surveys on 7 indicators, 5 of which – delivery times, purchased material inventory levels, new orders, production and employment – make up the composite index, which acts as a leading economic indicator (Strozier, 1996). PMI is a coincident indicator that would provide forecast on production and growth. Employment and unemployment data will guide the decision making process in the timing of starting a hardware store. A high unemployment coincides with a recession and takes a long time to improve even after a recovery.

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Throughout this essay, economic indicators and resources will be discussed in support of opening a high-end building hardware store.

Statistical Indicators

Consumer Confidence Index (CCI). According to Kopocka (2017), consumer confidence plays an important role in households’ decision-making processes. The perceived importance of consumer attitudes is evidenced by the attention paid to announcements made by the Conference Board and the inclusion of the Consumer Confidence Index (CCI) in the Commerce Department’s Index of Leading Economic Indicators (Chopin & Darrat, 2000).

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Chopin & Darrat (2000) further explains that changes in the CCI can predict movements in personal disposable income, interest rates, and to some extent, the DJIA. The Conference Board’s Consumer Confidence Index increased again in October 2018, following a modest improvement in September standing at 137.9 (1985=100), up from 135.3 in September. Figure 1 shows a trend of CCI over time with an increasing trend since year 2009.

Housing market. Each month, the Office of Policy Development and Research (PD&R) produces a monthly report on the health of the nation’s housing market. The National Housing Market Indicators report highlights key statistics and trends in the housing market. The housing market is heating up creating an increase in house prices as shown on figure 2.

Purchasing Manager’s index (PMI). The report issued by the Institute for Supply Management (ISM) in October 2018 indicated a month over month decrease of 2.1 percentage points from September. The comments from the panel releasing the report reflect continued expanding business strength (ISM, 2018). Table 3 shows that PMI is growing according ISM’s October 2018 report.

Civilian unemployment rate. The unemployment rate represents the number of unemployed as a percentage of the labor force. Labor force data are restricted to people 16 years of age and older, who currently reside in 1 of the 50 states or the District of Columbia, who do not reside in institutions (e.g., penal and mental facilities, homes for the aged), and who are not on active duty in the Armed Forces. A low unemployment rate means home-owners will make repairs, purchase items they have put off for a while and remodel to beautify their homes. A low unemployment rate presents a challenge for employers who have difficulty attracting enough workforce. Additionally, compensation for the workforce may be higher in order to retain the workforce. The Bureau of Labor Statistics’ October 2018 civilian unemployment reported 3.7% with a steady decline since 2009 as shown on figure 4.

Consumer Price Index (CPI). Consumer price index is a monthly measurement of prices of most household goods and services in the United States. Despite having a growing economy, CPI does not indicate a need to worry about inflation. The Consumer Price Index for All Urban Consumers rose 2.5 percent from October 2017 to October 2018, see figure 5. Consumer prices for food rose 1.2 percent during that period. Prices for food at home changed little over the year (up 0.1 percent), while prices for food away from home rose 2.5 percent. Energy prices were 8.9 percent higher in October 2018 than a year earlier (Bureau of Labor Statistics, 2018).

Leading Economic Index (LEI). The Conference Board publishes the leading economic indicator, an index that measures the top indicators. Among the ten components of the leading economic index includes building permits, average consumer expectations for business conditions, ISM index of new orders, and unemployment. The index’s components are constructed to summarize and reveal common turning point patterns in economic data in a clearer and more convincing manner than any individual component – primarily because they smooth out some of the volatility of individual components. The composite economic indexes are the key elements in an analytic system designed to signal peaks and troughs in the business cycle. Leading Economic Index (LEI) for the U.S. increased 0.1 percent in October to 112.1 (2016 = 100), following a 0.6 percent increase in September, and a 0.5 percent increase in August.

Justification

Leading economic indicator series gauge whether a recession is forthcoming. Leading indicators have an advantage over more complex econometric models: the index can be readily understood and interpreted (Marco, 2001). Business forecasters can use time series models to predict when the economy hits an upturn or downturn by combining the classical time series decomposition model with the Composite index of leading economic. The Conference Board’s statement following the release of the October report indicated “the index still points to robust economic growth in early 2019, but the rapid pace of growth may already have peaked.” The prospects of starting a hardware store remain solid.

The current consumer confidence of 137.9 is suggests a higher prospect of consumer spending to support a hardware store in their neighborhood. Empirical findings suggest that some consumer confidence indexes (subjective indicators) contain predictive ability beyond economic fundamentals (objective indicators) and that they are useful in analyzing and forecasting household saving and borrowing behavior (Kopocka, 2017). A high consumer confidence will also translate to a good forecast of consumer spending. A hardware store opening can be supported by a high consumer confidence index.

A civilian unemployment rate of 3.8% in October 2018 is an indication of a strong economy. The economy boomed in the second half of the 1990s with low unemployment, with output and productivity growing rapidly (Trehan, 2003). The historic perspective from the 1990’s would indicate an increase in productivity with the current low unemployment. A start-up hardware business selling high end construction building materials can be supported in the current economy with a low unemployment rate.

Purchasing Managers’ Index of 57.7 heading in a “growing” direction and a slow rate of change is indicative of a continued expanding business economy. This index shows an economy that can support a new high-end building materials hardware.

Consumer Price index (CPI) rising at a rate of 2.5% from October 2017 to October 2018 shows a modest increase. Consumer Price Index has a significant positive long-run relationship with money supply, interest rate, and index of industrial production (Srinivasan, 2011). A stable CPI would in turn increase consumer confidence and provide positive impact on a new hardware.

A strong housing market indicator shows a market that has recovered from the 2008 recession. The market is showing a steady appreciation of housing prices. With a strong housing market, a hardware providing fine building materials will attract homeowners who are in a quest to beautify their homes.

Conclusions

Businesses typically forecast 12 to 36 months in advance. The time series models commonly used work well in identifying patterns during stable times, and do not work well during, at the beginning, or at the end of a recession (Keating, 2009). Business forecasters can use time series models to predict when the economy hits an upturn or downturn by using economic statistic indicators. Starting a high-end building materials hardware can be supported using available economic indicators. A positive purchasing managers’ index, a high leading economic index, a low civilian unemployment rate, a strong consumer confidence index and stable consumer price index indicate a good prospect of starting a new hardware store.

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Comprehensive Forecast for a New Building Hardware Store. (2021, Sep 22). Retrieved from https://studymoose.com/comprehensive-forecast-for-a-new-building-hardware-store-essay

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