homebuildingindustry43034 by n26GQ3


									Utilizing the six economic indicators you used in the Industry Overview Paper, prepare a
700-1,050-word paper in which you define each of the six indicators, and describe its
current status. Include the effect of Federal Reserve actions on your industry. In addition,
present a separate graph illustrating the historic trend for each indicator.

1. Economic Indicators Presentation

                             THE HOME BUILDING INDUSTRY
The Home building industry is one of the critical industries to enhance the economic
development of the nation. The US is facing recession due to sub prime crisis, but
available are opportunities in terms of tax breaks and green home building. In fact, The
U.S. Senate recently gave $25 billion in tax breaks aimed at home builders and other
businesses affected by the downturn.
SWOT analysis
SWOT Analysis is a dominant method to comprehend Strengths and weaknesses, the
same as viewing the Opportunities and Threats one faces.
Exclusively, SWOT Analysis is a simple but commanding framework for analyzing the
company’s Strengths and Weakness, and the Opportunities and Threats the company
faces. This makes it possible for one to center on strengths, shrink threats, and bring the
utmost potential gain of opportunities available to anyone benefiting.
External Factor
•       Fiscal relief
•       Green Home building
•       Opening up through WTO
•       Increasing government regulations
•       Strong competition
•       Technological changes
•       Recession
•       Customer Intimacy
•       Economies of Scale

•   Financial crisis
•   Lack of confidence

Impact of Macroeconomic indicators

       According to David Colander (2004), “Macroeconomics is the study of the
aggregate moods of the economy, with specific focus on problems associated with those
moods – the problems of growth, business cycles, unemployment, and inflation.”

I will discuss the other economic indicators besides we discussed last time:
1) GDP projections

The average annual growth rate of GDP was 2.9% during 2003, while GDP per capita
grew at 2% in the same year. There has been growth of 3.3% in 2006 and it's slightly
better than 2005 but worse than 2004. Thus the GDP growth is moderate.
This is due to :
1) Increase in Imports
2) Decrease in Exports
3) Decrease in spending by the Federal government.
In the first quarter of 2007 US Economy Growth was .7% at the Annual rate.


Impact on homebuilding industry
In 2007 there has been moderate growth; hence this will restrict the growth in home
building markets as per GDP forecasts.

Interest rate

The price, or cost, of debt capital is the interest rate.
The real rate of interest is approximated by taking the nominal interest rate and
subtracting inflation. The real interest rate is the growth rate of purchasing power derived
from an investment.

Following factors affect interest rates:
1)     Supply versus demand of investment funds
This will affect the interest rates. For example tight monetary policy results in short term
interest rates being higher than longer term rates. It’s because of tightening of supply of
money leads to increase in short term interest rate. This occurs as a shortage of money
and credit drives up the cost of short term capital. Longer term rates can stay lower, if the
investors see loosening of monetary policy in long term which will lead to the greater
demand of long term bonds. Similarly if demand of fund is higher than it can lead to the
increase in interest rates and vice verca.

2)    Inflationary expectations
In economics, inflation is an increase in the general level of prices of a given kind.
General inflation is referred to as a rise in the general level of prices. Impact of Inflation

It leads to uncertainty about the value of money - the future prices of goods and services -
can be damaging to the proper functioning of the economy. When prices across the
economy are fairly stable, specific changes in the prices of individual goods and services
allow firms and individuals to make decisions about how much to consume, how much to
produce and invest, and how much to save or borrow. These price changes are reasonably
clear to see; they are not obscured by a general rise in prices.

But when the prices of most goods and services are rising, it is more difficult to know
which items are rising in price relative to others. This often results in large falls in output
- ie a recession - as the imbalance in the economy was abruptly corrected. One of the
costs of unsustainably high output growth - an economic boom - and the resultant upward
pressure on costs and prices has been large falls in output and employment. Thus it also
leads to greater instability in the economic conditions. Thus inflation leads to reduction in
employment and increase in wage rates. There is reduction in employment because of
recession and increase in the wage rates in the economy. If there is increase in
inflationary expectations then it will lead to hardening of interest rates, and vice verca.
3)     Risk characteristics

The risk characteristics of debt or bond have got great impact on the interest rates. The
bond rating is one of the important indicator of the risk characteristics of the bonds. The
bond rating has considerable impact on the interest rate paid by a corporation. Bond
rating indicates the credibility and the paying capacity of the organization. Thus if the
organization has higher rating then the interest rate paid by it will be less. This is because
higher rating indicates more safety. Thus more safety means less default risk and less
interest rate to be paid by the organization. Thus better ratings means less risk and less
cost of capital or interest rate.


Fed funds rate

The Federal Reserve controls the three tools of monetary policy--open market operations,
the discount rate, and reserve requirements. The term "monetary policy" refers to the
actions undertaken by a central bank, such as the Federal Reserve, to influence the
availability and cost of money and credit to help promote national economic goals. The
Federal Reserve Act of 1913 gave the Federal Reserve responsibility for setting monetary

Thus the three ways in which the federal reserve can change the money supply are
1. Change in Bank Rate (Fed Fund Rate)
2. Open Market operations like buying and purchasing of government securities
3. Change in Variable reserve ratio
The recent policy is of relaxed policy as the fed fund rate has been reduced from high of
5.25% in June 2006 to 2.25% currently.

This is done to improve the supply of money and to avoid recession. The forecasts done
by forecasts.org are of 2.5% at August 2008.
2008                   Aug
Forecast Value         2.50
We can infer that two year forecasts will be around 2%.

http://www.forecasts.org/ffund.htm as retrieved on 18 Mar 2008 07:45:37 GMT.
As per the guardian the two year forecasts is 1.75%

Yes, I agree to these forecasts and the fed fund rate will be around 2% two year hence.
This is good for motor parts industry as the interest rate is low and people will be
encouraged for purchasing automobiles in long term. Near term the growth will be slow
due to low GDP.

Other References:

       wikipedia website
      Links mentioned in the discussion.
      http://www.economicindicators.gov/

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