Macro Mondays: Growth Rates
Welcome to another edition of Macro Mondays! Today I thought it would be a good idea to examine growth rates - they get thrown around a lot in just about every industry, but how can you tell if they're really good or bad? A positive number sounds good, but if it's substantially lower than the growth of the previous year, that's not necessarily great. Whereas a negative growth rate sounds bad, but what if it's actually the closest reading to being positive that the industry has ever posted?
Investopedia has some great explanations on the basics of growth rates. Below are the import pieces you need to know whenever the term "growth rate" pops up in your social media feed.
What Are "Growth Rates"?
Growth rates refer to the percentage change of a specific variable within a specific time period, given a certain context. For investors, growth rates typically represent the compounded annualized rate of growth of a company's revenues, earnings, dividends and even macro concepts such as GDP and the economy as a whole. Expected forward-looking or trailing growth rates are two common kinds of growth rates used for analysis.
how are growth rates used?
At their most basic level, growth rates are used to express the annual change in a variable as a percentage. For example, an economy's growth rate is derived as the annual rate of change at which a country's income increases or decreases. In fact, this rate of growth is used to measure an economy's recession or expansion. If the income within a country declines for two consecutive quarters, it is considered to be in a recession. Conversely, if the country has a growth in income for two consecutive quarters, it is considered to be expanding.
what's an example of using growth rate analysis?
Retail sales growth is one of the most important growth rates for an economy because it represents consumer confidence and customer spending habits. When the economy is doing well and people are confident, they increase spending, which is reflected in retail sales. When the economy is in a recession, people reduce spending and retail sales decline.
For example, second-quarter 2016 retail sales growth for Ireland was reported on July 20, 2016. It was found that domestic retail sales flat-lined through the second quarter of the year. It is believed the political instability within the country, combined with the results of the Brexit vote on June 23, 2016, caused Ireland's sales to stall. While some industries showed positive growth, such as agriculture and garden, other industries within the retail sector counteracted that growth. Fashion and footwear had negative growth for the quarter.