What Does the Fall of Retail Mean for the Country’s GDP?

It is no secret that consumer spending has shifted in the recent economic climate. Brick-and-mortar retailers are suffering under the pressure from e-commerce sites like Amazon. In the past year alone, there have been countless stories of Big Box retailers like Macy’s, JCPenny and more closing stores in an effort to remain profitable.

But does the fall of retail spending mean the fall of consumer spending altogether? Will the country’s GDP will be affected? While these are valid questions, the answer, in short, is probably not. Unfortunately, if the economy were that easy to predict, we probably wouldn’t have had the economic recessions that we have in recent years.

According to AP, consumer spending in the U.S. rose 0.1 percent in April, 0.2 percent in May and June, and 0.3 percent in July. These increases occurred in tandem with a 0.4 percent increase in incomes in June and a 0.5 percent rise in wages and salaries in July. Though these increases in consumer spending have been slight, the addition of the increases in income and wages is another good sign for the overall GDP of the country.

In 2017, the GDP has been rising consistently overall. According to Reuters, there was a 1.2 percent growth pace from January-March. With the increased consumer spending in the following months, GDP increased at a 3.0 percent rate from April-June.

Even with the growth of both consumer spending and the GDP in the US, some people are still concerned about the country’s economic activity overall. Consumer spending alone accounts for about 70 percent of the country’s overall GDP, according to economists, and those who are skeptical about the small growth numbers say it is not enough to evoke enough confidence for the future.

While consumers may not be spending their money on retail like they once were, the fact is they’re still spending that money somewhere. Some say healthcare spending has taken the place of retail spending for many, while some say the shift is in millennials wanting to spend their money on experiences, rather than material goods.

Regardless of the exact cause of the recent fall of the retail industry, consumers are still finding things to spend their money on, and that is the most important thing to maintain the health of the economy. As long as the overall GDP continues to rise and consumer spending is a contributor to that, the country is on a path to continue growing and prospering.

Retail Realignment – Good or Bad?

Having been around for centuries in the United States, the retail industry is no stranger to the economy we live in today. The industry is constantly experiencing ups and downs, depending on the styles, trends, and brands that are “in” at the moment. However, the industry is now experiencing something different – a revolutionary shift to e-commerce at a rapid pace. Recent studies show that just over half of the American population today prefers shopping online. I mean, who even likes spending hours at a mall just to find one t-shirt?According to the U.S. Bureau of the Census, as of this quarter, e-commerce retail sales make up 8.9% of total retail sales. Overall, this percentage has increased by 13.8% since 2000. As a result, retail companies are shutting down store locations, laying off employees, and some are even going under.

Just like almost any other advancement in technology, this disruption in the retail industry has had a direct effect on employment. According to The Atlantic, major department stores, such as Macy’s, have “shed nearly 100,000 jobs” from October 2016 to April of this year.

So how is it that thousands of jobs are being shed as a result of this transition, but yet we are seeing an increase in the number of jobs and wealth in America? Economist Michael Mandel believes that this shift towards online retail has actually had a positive impact towards employment. His studies show that the e-commerce market has created more jobs than the total lost jobs caused by the transition. But wait, there’s more! – These new jobs that are being created by the e-commerce sector are paying much higher wages than traditional retail jobs.

The statistics generated by Mandel assume that “general warehousing” jobs are directly correlated with retail sales. He uses the example of Amazon to justify his argument by saying that they employ 12,000 employees, which includes warehouse workers, rather than the 2,640 that the Bureau of Labor Statistics states, which does not.

Mandel might be up to something with his optimistic analysis, but it is truly very difficult to measure the direct effect e-commerce has had on employment. There are just way too many aspects, making it too complex to come to an accurate conclusion. However, it is always great to hear that we might actually be heading towards the right direction. Many people would argue – What will happen once robots start replacing humans in these warehouses? I guess we’ll just have to wait and see!

 

References:

https://fred.stlouisfed.org/series/ECOMPCTSA

https://www.bigcommerce.com/blog/ecommerce-trends/

https://www.theatlantic.com/business/archive/2017/04/the-silent-crisis-of-retail-employment/523428/

 

U.S. GDP Grew 3%, Fastest Growth since 2012

The U.S. Commerce Department said on Wednesday that the U.S. economy had expanded by 3% in the second quarter (April-June) of the year. It’s not only better than the previous estimate, 2.6%, but also a substantial boost from the first quarter’s 1.2%.

 

“The acceleration in real GDP in the second quarter primarily reflected upturns in private inventory investment and federal government spending and an acceleration in PCE that were partly offset by downturns in residential fixed investment and state and local government spending and a deceleration in exports,” according to the report. To sum up, consumer spending is basically the backbone of the second quarter GDP growth.

President Trump commented on the growth that he thinks the economy will “go much higher than 3 percent.” Economists and the media, however, are not too optimistic about future growth. In an analysis, the New York Times straight-out called it a “Sisyphean challenge”:

“There are several reasons that his goal is probably far-fetched, namely the country’s aging work force and slower population growth than in the past. Combine that with low productivity growth, and hitting Mr. Trump’s target begins to look like a Sisyphean challenge.”

The impact of Hurricane Harvey is minor, according to a CNBC analysis.

President Trump said on Wednesday, “on a yearly basis, as you know, the last administration during an eight-year period never hit 3%. So we’re really on our way.”

However, he is incorrectly comparing a quarterly growth to an annual growth. In this handy chart by Fortune, we can see clearly that quarterly growth during Obama exceeded 3% eight times.

 

Retail is Dying –– What does that mean for employment?

It is no surprise that retail is taking a heavy hit in 2017 with some of the most well-known and largest retail companies closing their doors to the public, or worse, filing for bankruptcy. With the up-roar of e-commerce, consumers choose to shop online for the quick satisfaction of the click of a button instead of making their way through traffic, parking, and rushing through people in an over-sized mall.

The CEO of Urban Outfitters, Richard Hayne described this issue in accordance with the housing market when he said, “Retail square feet per capita in the United States is more than six times that of Europe or Japan. And this doesn’t count digital commerce. Our industry, not unlike the housing industry, saw too much square footage capacity added in the 1990s and early 2000s. Thousands of new doors opened and rents soared. This created a bubble, and, like housing, that bubble has now burst. We are seeing the results: doors shuttering and rents retreating.”

So, what does a massive hit in retail mean for jobs? Unsurprisingly, retailers have publicly announced over 200,000 lay-offs in the last four years and a growing 89,000 in 2017 alone. According to Business Insider, stores are closing at a rate not seen since the recession. When looking at the data, there is an interesting story being told. This chart shows that both traditional and online retail are soaring since the Recession. However, when diving deeper into particular industries is when we see a hit in job loss.

This chart shows the decline of employment from appliance and electronic stores which were a huge industry to shut their doors to the public.

And then we have, of course, the struggling clothing and retail market chart that shows the loss of employment in the last few years.

With no surprise, e-commerce has soared in the last couple of years, but are they hiring those transitioning out of traditional retail positions? Probably not. While the retail industry is known for high turnover rates it is also known for hiring 1 out of 10 American workers within a large age range. That said, most of these workers being laid off do not hold the set of skills that an e-commerce job would entail.

So, is this weird retail hit of 2017 an economic indicator of what the future of the economy holds? Well, according to Mark Cohen, the Director of Retail Studies at Columbia University, the huge hit that retail continues to take is creating a “slow-rolling crisis.” The large amount of people that have lost their retail position and will continue to lose it (considering the way retail is going) are now going to spend less money since they are going through a period of unemployment which will create a “cascade of economic challenges,” says Cohen.

It will be interesting to continue to see the trajectory of retail, but right now it is looking like the start of a very interesting and slow rolling economic indicator. Would it be too big to say that we could be on the path towards another economic recession?

Sources:

http://www.businessinsider.com/retail-job-losses-are-hurting-the-economy-2017-4

https://psmag.com/news/the-long-and-painful-decline-of-the-retail-store

https://www.theatlantic.com/business/archive/2017/04/retail-meltdown-of-2017/522384/

Higher Heels = Worse Economy?

From lipstick to ties, people have long considered fashion items as indicators for the economic climate. According to researchers at IBM, the height of high heels is another economic indicator that has a correlation to economic health.

A team of researchers at IBM led by consumer product expert Trevor Davis used social media sites and blog posts to find that the popularity of flats and low-heeled shoes is a possible sign that the economy is growing, whereas higher heels indicate the opposite. According to an IBM report, low-heeled flapper shoes in the 1920s were replaced with high-heel pumps and platforms during the Great Depression. Although low-heeled sandals were big in the late 1960s, platforms came back again during the 1970s oil crisis. More recently, the median height of women’s heels peaked at seven inches in 2009 during the recession, and then dropped to two inches by 2011 as the economy recovers.

Davis suggests that the reason women turn to higher heels during economic downturns is that more flamboyant fashions serve as a means to escape the harsh reality. There are, of course, other possible explanations for women’s preference of lower heel heights. Women may simply be embracing a more pain-free walking experience, or the natural cycle of fashion trends sometimes happens to coincide with the economic cycle. However, there is still a great possibility that low heels may actually indicate longer-term economic.

Social Media & the Economy

There are billions of social media users around the world, as this number continues to increase. In 2017, almost everything is, or can be, done over the Internet; whether it is wishing your cousin in Australia a Happy Birthday, spreading awareness about your lost dog, researching about why your stomach may be hurting, or even exposing your knowledge and credibility in your craft.

Most importantly, social media has played a huge role in revolutionizing the way businesses operate. Brands are now able to expose themselves right in front of your eyes no matter where you are.

You can be in bed, scrolling through your Facebook timeline, and potentially come across an advertisement that sparks your interest. After about 4 clicks, you can purchase that product and have it arrive at your doorstep as soon as the next day. More importantly, you just generated business for that company while you were in bed.

Businesses are able to use social media to learn more about themselves. Reviews, feedback, and consumer research has never been easier, allowing businesses to spend less money on what is not working and pump more money into what is. This is so important for businesses to pay attention to and utilize, because it is something that can potentially take your company to the next level.

This magical ability through the use of social media has sparked a new wave in the economy. Entrepreneurship is at its highest peak of popularity, because now you can legitimately operate your business from your living room – all you need is a laptop.

This has even impacted the decrease of the unemployment rate. The word “unemployment” has lost a lot of its weight, partially due to the easily accessible online market places; where you can buy and sell almost any item to make money.

“Freelancers” have also gained tremendous popularity with the rise of social media. Let’s say you had enough of your boss so you quit your job, but you haven’t found a job yet, or you recently got laid off and are in the middle of a job hunt: During this time, you can now list your skills and experiences online and find contract jobs to work on for money until you find another job. This may even work out better for you, and the autonomy could be the cherry on top!

Social media has really disrupted the economy – for the better. There is so much opportunity in the world, and the Internet has literally placed it right in front of your eyes.

 

References:

http://ageconsearch.umn.edu/bitstream/162500/2/SAEA%20Econ%20Impacts%20Paper%202014%20Submitted.pdf

https://www.theatlantic.com/technology/archive/2010/10/is-social-media-driving-the-economy/64780/

https://www.forbes.com/forbes/welcome/?toURL=https://www.forbes.com/sites/quora/2017/08/02/how-does-social-media-influence-the-economy/&refURL=https://www.google.com/&referrer=https://www.google.com/

 

Trump’s Tweets and the Dow

President Trump’s recent election has been accompanied by many ups and downs for the United States, but in terms of the Dow Jones Industrial Average, the Trump administration has proved to be a healthy change. After the election, excitement around the new president’s policy promises caused the Dow to soar to record-breaking heights. It reached 22,000 even in the midst of unrest in the administration’s leadership according to CNN. It is interesting to note the disconnect between political turmoil and the Dow as of late. President Trump’s administration has set many precedents so far and one is the number of high-level advisors that have left the president’s side in such a short window of time. With that being said, the Dow has not been severely affected. The president continues to be its biggest cheerleader and tweets predictions about it as well. CNN notes that not only is this unheard of for a president to weigh in so frequently about the stock market, but to target the Dow specifically in his comments is new. This recent rhetoric surrounding the stock market is not only unprecedented, but it will not last. The market is constantly fluctuating and what goes up, must come down. It will be interesting to see how the new president reacts to the Dow going in the opposite direction. Will he remain outspoken or zip his lips? While we are all inclined to look at all of president Trump’s statements with a grain of salt, the Dow does actually indicate the economy is doing well. CNN Money questions if that the rise of the Dow is due to the new president’s pro-business agenda or lasting effects of President Obama’s rule? We will never know. Nonetheless, confidence is high in the stock market since the election in 2016 and as an economic indicator, the Dow is providing no need to worry about the market’s health. What is on the horizon though, is the reality that the stock market is a malleable entity and it will fluctuate. Confidence and campaign promises are keeping the Dow in an upward rise these days and despite threats of Russian probes and potential for a missile attack from North Korea, the stock market has remained stable for the most part. Stay tuned for more updates on the continuing saga of an interesting correlation between a rocky administration and a unique rise of the Dow Jones Industrial Average in next week’s edition of “Trump’s Tweets.”

 

Sources: http://money.cnn.com/2017/07/20/investing/trump-wall-street-stock-market-record/index.html

http://money.cnn.com/2017/08/02/investing/dow-22000-trump-apple-wall-street/index.html

http://www.marketwatch.com/story/trump-tweet-shows-hes-a-dow-jones-industrial-average-man-2017-08-01

What is Consumer Sentiment?

Believe it or not, your opinions count! Your views regarding the health of the economy, long-term economic growth and your personal financial situation play a role in shaping public policy, economic policy and stock markets. You are, essentially, an economic indicator, according to the University of Michigan. Feeling special now?

Consumer sentiment is a measurement of the overall health of the economy, determined by consumer opinion. It directly relates to the strength of consumer spending. The University of Michigan’s Michigan Consumer Sentiment Index (MSCI) is the most popular publications of consumer sentiment. American households are contacted randomly each month via telephone. Here, the chosen ones are asked about their financial situation and attitudes about the economy.

The Force, aka. The University of Michigan, releases the final report of the previous month on the first of the next month. Basically, the index is useful to economists because it gives a snapshot of whether consumers feel like spending. Yep, Leo… We’ve all been there at Chipotle.

Inflation and favorable employment conditions are what give consumers the urge to spend. But, current events also affect how much we spend. Things like bull and bear markets, and geopolitical events.

Why are economists dying to know what consumers are up? Because consumer spending accounts for more than two-thirds of the economy. This is, basically, real-life Gossip Girl… your one and only source into the financial activities of America’s citizenry. Where have they been? And what have they been up to? Who knows? You know you love me, xoxo… the economy. So, the more confident consumers are about their finances and the economy, the more likely they are to spend.

The MCSI is determined by subtracting the percentage of unfavorable consumer responses from the percentage of favorable ones. It is calculated based on the following five core survey questions:

  1. Compare the pair – Would you say that you are better or worse off financially than you were a year ago?
  2. After some crystal ball gazing – Do you think a year from now you will be better off financially, worse off, or about the same as now?
  3. Now, let’s get down to business – As a nation, do you think the next 12-months will be financially good or bad?
  4. Back to the future – What would you say is more likely: the country, as a whole, having a good five-years or so, or periods of widespread unemployment / depression?
  5. To spend or not to spend? Do you think it’s a good or bad time to buy major household items, such as furniture, refrigerator television etc.

After the relative scores have been worked out, and the actual equation of CSI = x1 + x2 + x3 + x4 + x5 / 6.7558 + 2.0 has been left in the school hallway for the Will Huntings of the world to work out, we have the CSI!

And there we have it – the MCSI – one of the leading indicators of consumer sentiment in the United States.

 

References

Investopedia 1

Investopedia 2

Economic Calendar

Here’s One Way to Measure How People are Doing Financially

Gross domestic product growth can provide valuable information about the health of a nation’s economy, but it rarely goes any deeper than that broad lens. Disposable personal income is one way to indicate how people are doing on a more narrow level.

Disposable personal income is a measure of how much money families have once taxes are deducted from their paycheck. Disposable personal income is usually displayed in billions of dollars.

Disposable personal income shows how much people have left over, not just what they spent. If consumption is low but disposable personal is high it could mean people are putting more money towards necessities and/or saving.

This metric can also be compared to other indicators, like food prices, to determine what percentage of a person’s disposable personal income is being spent on necessities.

The USA Today said in a recent article that people are spending almost half of what they used to on food, which may mean that they are spending more of a percentage of their disposable personal income on other necessities, like housing and healthcare.

Disposable personal income has been on a steady upward trend since 1960 and before the great recession between 2008-2009 it briefly spiked from 10.8 trillion to 11.4 trillion (numbers adjusted for inflation). During the recession disposable personal income contracted.

Disposable personal income since 1960.

Since the recession, the trend moved upward, and in 2012 reached a sudden peak of 13 trillion. More recently, in 2017 disposable personal income contracted by around 4 billion.

Disposable personal income in 2016 – 2017.

2017’s lower numbers could account for stagnant wages, higher taxes and a number of other things.

Disposable personal income is a helpful economic indicator because it can be compared easily to other indicators and shows how the average person is doing in the economy. But as it is in the aggregate it leaves economic inequality out of the picture.

Behind Bars and Bonuses: How the U.S. Private Prison System Became a Multi-Billion Dollar Industry

The United States incarcerates more people than any other country in the world, with approximately 2.2 million inmates behind bars in state, federal and private prisons across the country. That’s over half a million more inmates than in China, whose population is four times the size.

The Beginning of the Modern Private Prison Industry

The sharp increase in incarceration levels can be traced back to the 1970s, when the government struggled to combat the nationwide issue of drug-use and crime. When President Nixon declared a war on drugs in 1971, it forced an increase in tough policies against crime across the country.

In the two decades following 1980, the incarceration rate more than tripled, which led to major overcrowding in jails across the country. To tackle this issue, many states turned to private companies to build or run their prisons.

The first modern private prison was built in Tennessee in 1984 by the Corrections Corporation of America (CCA). Its opening marked the first time that any state government had contracted out the full operation of a prison to a private corporation.

What began as a quick-fix solution to the overcrowding of public prisons, the for-profit prison sector now accounts for 10% of the corrections market with an annual turnover of $7.4 billion per year.

As of 2013, the US Department of Justice reported that 19.1% of the federal state prison population is housed in private prisons along with 6.8% of state prisoners. Today, there are over 130 for-profit prisons with 157,000 beds and this number is expected to reach 360,000 by 2026.

For-profit prisons are legal in 29 states across the country with some relying predominantly on private facilities to house their inmates. For example, nearly 44% of all New Mexico prisoners are held in private prisons, followed by 38.7% in Montana.

While the rate of violent crime in the United States has fallen by about 20% since 1991, the number of people in prison or jails has risen by 50%, as roughly 13 million people are sent to jails in any given year.

But how does that make sense?

Proponents against private prisons argue that the contracting of prisoners has created an economic incentive to put people behind and because of this, for-profit prisons rely on the incarceration of prisoners to keep their corporations afloat and their stockholders happy.

 

Private Industrial Complex

This complicated intersection of public and private interests is known as the “prison-industrial complex”. The term was created to explain the correlation between the rapid expansion of the United States’ inmate population and the influence of private prison companies that house and supply labor to government prison agencies.

The corporations who operate under this title include construction companies, surveillance technology providers, private probation companies, lobby groups, and even prison cafeteria vendors. This complex, however, has become highly controversial, as the economic and social implications of “contracting out” prisoners to private companies has placed the privatization of prisons at the forefront of American politics.

The prison-industry complex is one of the fastest growing industries in the United States, with private prisons accounting for the largest business in the group.

 

Why Support Private Prisons?  

 The main argument for establishing private prisons is that they can provide correctional services more efficiently and for a lower price than the government itself. This is because they do not have to compete directly with other state penitentiaries for contracts and are able to decide on the types of inmates that they will house. Similarly, those in favor argue that they provide a financial solution that prevents the government from having to invest major capital into building new prisons and providing other benefits such as pensions, salaries, and health-care.

Supporters of this industry argue that private prisons are more advantageous for American taxpayers, as for-profit owners have more incentives to find efficient practices and lower overall costs. Furthermore, private prison corporations claim that building new facilities generate income for surrounding communities as they create jobs and receive tax revenues.

 

Arguments Against Private Prisons

 However, the validity of these arguments are hard to confirm, as an evaluation of 24 independent studies on the cost-effectiveness of public vs. private prisons found that for-profit institutions were no more cost-effective than public ones. Instead, the report suggests that the most important factors in determining a prison’s daily cost per inmate are the facilities economy of scale, age, and security level. A 2011 report by the American Civil Liberties Union also found that in addition to influencing mass incarceration levels, private prisons are more expensive, more violent and less accountable than public ones.

Since private prisons are created to be more cost efficient than public ones, it is common for them to have lower staffing levels and training than their counterparts. This links to the argument that violence against guards tends to be higher, as a nationwide study found that assaults on guards were 49% more frequent in private prisons than in those run by the government.

The key arguments against the establishment of for-profit prisons are that they are not run with safety in mind, they harm minorities, they create financial incentives to incarcerate and they corrupt the political process. They argue that firms in the prison business reap profits by billing the government more than is needed and find alternative ways to lower costs which can make prisons less secure.

Secondly, it is argued that for-profit prisons marginalize minority groups, as according to a report by the Justice Policy Institute, private companies hold nearly half of the nation’s immigrant detainees. This is double the rate that it was nearly a decade ago.

 

Policy, Politics, and Problems

Moreover, political corruption and the influence of corporations on federal detention policies have become an area of major contention. Because private prisons are for-profit, many of them are funded and invested in by national corporations, investors, and politicians.

Of both public and private correction systems, Corrections Corporation of America (CCA) operates the 5th largest in the US and has 51 owned-and-operated facilities in 16 states and 18 state-owned facilities in 7 states. Their large market share provides them with a staggering market cap of over $3 billion and reported revenues of $1.84 billion in 2015. Likewise, the 2nd largest private corporation, GEO group, reported $1.79 last year.

 

So how much political influence do these corporations have?

 

According to a report by the Justice Policy Institute, private prisons increase their political influence through lobbying, direct campaign contributions, and building relationships and networks. This notion is supported by the fact that both corporations have funneled more than $10 million to political candidates since 1989 and have spent nearly $25 million on lobbying efforts.

Lobbying is a key reason why these for-profit correction corporations have been able to achieve such high margins, as their efforts have influenced government at all levels to underwrite private prison expenses and to pass laws that ensure certain levels of beds will be filled at each prison…also known as an incarceration quota? For example, in 2015 CCA and GEO lobbied for a Congressional mandate that required 34,0000 immigration detention beds be maintained and paid for with tax dollars.

Due to lobbying efforts, these corporations are also exempt from taxpayer oversights, as they have been excluded from the federal disclosure system under the Federal Freedom of Information Act, which denies public access to private prison operation records.

In an interview with the LA Times, Alonzo Peña, former director of US Immigration and Customs Enforcement from 2008 to 2010 said, “he had long been concerned that for-profit prison companies had been hiring former immigration official to help them secure favorable contract terms.” This is extremely problematic as manipulating the system through contracts allows the corporations to be exempt from following governmental standards and protocol.

 

So if the government is not responsible for keeping watch on these private prisons…who is?

 

The haziness between what is legally acceptable and followed by these private prisons continues to cause controversy in the US, as the government’s level of jurisdiction over these corporations becomes increasingly unclear.

What was created as a short-term solution to combating overpopulation has developed into a multi-billion-dollar industry where investors are pouring their money into these corporations’ stocks to watch the value go up on the stock exchange.
However, the tradeoff between public and private interest doesn’t seem to balance…

More inmates? More Money?

A life-sentence for a stock?

That sounds like democracy…right?

 

 


SOURCES:

http://www.globalresearch.ca/the-prison-industry-in-the-united-states-big-business-or-a-new-form-of-slavery/8289

http://www.economist.com/blogs/democracyinamerica/2010/08/private_prisons

http://greengarageblog.org/5-foremost-pros-and-cons-of-private-prisons

http://www.truth-out.org/news/item/21694-shocking-facts-about-americas-for-profit-prison-industry

https://www.propublica.org/article/by-the-numbers-the-u.s.s-growing-for-profit-detention-industry

https://www.washingtonpost.com/posteverything/wp/2015/04/28/how-for-profit-prisons-have-become-the-biggest-lobby-no-one-is-talking-about/?utm_term=.a8418a44291a

http://www.huffingtonpost.com/bernie-sanders/we-must-end-for-profit-pr_b_8180124.html

https://www.theguardian.com/commentisfree/2012/jul/06/prison-labor-pads-corporate-profits-taxpayers-expense

http://cad.sagepub.com/content/45/3/358

https://smartasset.com/insights/the-economics-of-the-american-prison-system