Macroeconomic Analysis

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To determine the timeliness of Cousin Edgar’s plan to purchase four gas stations, a macroeconomic analysis of the economy is required. Edgar needs to know if expanding production/distribution of gasoline will be welcomed by the market, and whether consumers will have enough money to spend on the products he sells, from fuel to candy bars. This report will examine the GDP growth rate, interest rates, unemployment, the business cycle, fiscal policy, monetary policy, international trade, and demographics. We will examine 2013, particularly the fourth quarter, in order to get a recent picture of the economy for which we have complete data. With these macroeconomic indicators, we will be able to advise Edgar on the wisdom of his business plan.

GDP Growth Rate

The gross domestic product is defined as the total market value of all final goods and services produced within a given country in a certain amount of time (Hubbard & O’Brien, 2013, p. 617). Real GDP, as opposed to nominal GDP, will more accurately express the state of the economy, as it distinguishes growth attributable to price increases from growth attributable to actual increased production and sales. Real GDP growth for the last quarter of 2013 was 2.4%, a major decline from the previous quarter, and the second-lowest of the year. This number reflected an increase in imports and a decrease in federal and state spending (www.bea.gov). Since GDP can only be truly calculated after a given time period has passed, potential business owners should look at long-run trends as well as professional projections.

Interest Rates

When considering the implications of interest rates in starting a business, one must be sure to distinguish between real and nominal rates. Nominal interest rates express what percentage of the loan will be added to it as the cost for borrowing. Real interest rates take inflation into account to more accurately portray the changing value of the borrowed money. When borrowing money for a new business, a fair interest rate for the borrower will be one that accurately predicts the coming rate of inflation. Since inflation is currently quite low at 1.1% ("Inflation Rates," 2014, p. 1), interest rates are also very low, making it an attractive time to borrow money.

Unemployment

Business owners should be aware of unemployment rates. High unemployment means it will be easier to find workers who will stay at their jobs for a long time, yet it also indicates that consumers are less likely to spend money. Unemployment is an important indicator of the health of the economy. The average rate of job growth in 2013 was 182,000 jobs per month, a steady increase indicative of an improving job market (Zhang, 2014, p. 1). Yet the labor force participation numbers continued to slip, as more people stopped looking for work. This means, despite an official unemployment rate of 6.7%, the job market still has a long way to go. Economist Heidi Shierholz reckons that 7.9 million more jobs are required to return the U.S. to pre-recession levels (Zhang, 2014, p. 2).

The Business Cycle

Though most people in the developed world expect prosperity to increase over time, production, employment, and income fluctuate in a pattern known as the business cycle. When the economy is expanding, these variables increase; in a recession, they are negatively affected. From 2007 through 2009 the U.S. experienced its longest and most severe recession since the Great Depression. Currently, the economy is in a period of modest expansion. But all potential business owners should be aware of the business cycle and have a plan for the next, inevitable, recession. “Investment decisions are made in an environment of uncertainty and must be based upon producers’ expectations about future levels of demand.” (Mongiovi, 1993, p. 90). If a business correctly predicts economic expansion, it can reap major dividends by opening more locations and hiring workers. On the other hand, if these steps are taken prior to a recession, the results can be disastrous.

Monetary Policy

The money supply in the United States is managed by the actions of the Federal Reserve. The goals of the Fed include the stability of price levels, markets, institutions, high employment, and economic growth. The Fed primarily seeks to control inflation. During periods of slow growth, the fed will increase the money supply and keep interest rates low to stimulate borrowing and spending. When inflation starts to get out of control, the fed will absorb the extra funds by selling its Treasury bills, driving interest rates up and borrowing down. Since the recession, the Fed has been aggressively encouraging borrowing by keeping interest rates low, but the more effort expended by the Fed, the less confidence it expresses in the ability of the economy to stand on its own feet. At the end of 2013, the Fed showed some signs of easing its interference with the market. “Confidence in the recovery prompted the Fed last week to tentatively begin reducing the amount of government bonds it buys each month” (McDuling, 2013, p. 1). It is in this sense that a modest rise in interest rates actually signals a more stable economic environment for new businesses.

Fiscal Policy

Just as the Fed uses monetary policy to achieve macroeconomic goals, the US government uses taxation and spending for the same purpose. In the years after the recession, tax breaks and government spending aimed to keep the country from falling off the “fiscal cliff” into another recession. Higher taxes could cripple an already struggling middle class, while spending cuts could put federal employees and contractors out of work. The tax breaks ended up staying in place for most Americans, but the spending cuts went into effect on March 1, 2013. This has had a damaging effect on areas like education and infrastructure (Igan, 2013, p. 1). Political dysfunction in the federal government has hampered the institution of realistic plans for handling deficit reduction, social security, and government waste. As the population ages and healthcare costs rise, potential business owners will have to evaluate the fiscal policies of the federal government to determine the health of the economy in the short, medium and long term.

International Trade

Globalization has increased the importance of international trade for the U.S. economy. Imports and exports, as a percentage of GDP, have increased over time (www.bea.gov). This development has been aided by steadily falling tariffs over the years. Countries within NAFTA charge no tariffs at all on each other’s goods. Agreements like this are important in the oil industry since the U.S. gets much of its petroleum from Canada and Mexico. But recent government policy aimed at creating American jobs, such as the “Buy American” provision, can damage international trade by angering foreign exporters and disrupting the flow of business. American companies using imported parts, for example, do not benefit from the new government policies.

Demographics

Business owners should always be aware of demographic information in their given industry. For gasoline retailers, the trend among young consumers to purchase hybrid vehicles has meant a decline in sales. The popularity of social media and working from home, among this age group, is also significant, as it reduces face-to-face meetings and thus travel. On the other hand, the fact that the US has an aging population means that increasing numbers of older consumers are leaving the workforce and spending less time on the road. All of these demographic factors have resulted in a marked drop in gasoline consumption. “Gasoline sales on a per-capita basis are 8.0% lower than it was at the end of the Great Recession.” (Short, 2014, p. 1). These are important factors to consider for a potential retailer.

Recommendations

Our macroeconomic analysis revealed that the U.S. economy is growing at a modest rate. Unemployment is falling slowly, which is good news for Edgar’s potential business idea. Along with GDP growth and the Fed’s recent gestures of confidence, we have some indications that consumers are doing better financially, and thus will be spending more money. This is especially good for the sale of convenience items in Edgar’s stores. Low-interest rates indicate that it is a good time for Edgar to take out a loan.

On the negative side were factors such as government fiscal policy, which seem to indicate habitual dysfunction and the inability to address long-term problems. Failing infrastructure and a rising deficit should give entrepreneurs reason to worry. While Edgar is confident that U.S. consumers have grown accustomed to high gas prices, he may not realize the effect of those prices on his potential profit. If gas prices rise as projected, Edgar’s customers will be less willing to purchase convenience items. Higher prices also mean higher credit card fees for retailers. Forbes reports that gas retailers have paid more in credit card fees than they made in profits, for six years running (Forbes Staff, 2012, p. 1). Even more telling was our demographic analysis of retail gas sales. Not only did gas sales plummet during the Great Recession, but they have also continued to fall ever since. For the demographic reasons stated above, both technological and cultural, demand for gasoline has fallen, regardless of price drops. If prices go up, this trend might even accelerate. This might be the most crucial factor in our macroeconomic analysis, and leads us, overall, to discourage Edgar’s business plan until the demand for gasoline starts to increase.

References

Current U.S. Inflation Rates. (2014). Retrieved from http://www.usinflationcalculator.com/inflation/current-inflation-rates

Forbes Staff. (2012, May 9). How Bank Fees Hurt Gas Station Owners. Forbes. Retrieved from www.Forbes.com

Hubbard, R. G., & O’Brien, A. P. (2013). Economics (4th ed.). Pearson.

Igan, D. (2013). U.S. Fiscal Policy: A tough balancing act. Retrieved from http://blog-imfdirect.imf.org/2013/07/30/u-s-fiscal-policy-a-tough-balancing-act/

McDuling, J. (2013). US interest rates are beginning to rise, and that’s good. Retrieved from http://qz.com/161912/us-interest-rates-are-beginning-to-rise-and-thats-good/#/h/37487,2/

Mongiovi, G. (Ed.). (1993). Monetary Theory after Sraffa (pp. 85-109). New York: Edward Elger Publishing.

Short, D. (2014). Gasoline Volume Sales, Demographics and our Changing Culture. Retrieved from www.advisorperspectives.com

Zhang, M. (2014, Jan 10). US Jobs Report December 2013: Unemployment Rate Drops To 6.7%, Nonfarm Payrolls A Big Miss But Won’t Affect Fed Tapering Time Table. International Business Times. Retrieved from www.ibtimes.com