Sometime back I wrote about the gas prices and the gas station owners. From a simple math I did, I computed a margin of less than 5 cents a gallon that cost $3.50. If the customer paid in cash, the gas station earned additional 7 cents per gallon.
The Marketplace reports that the situation just got worse for gas station owners with gas now selling for $4.50-$5.00 a gallon. The credit card charges are set at a fixed percentage of 2% on the transaction but the gas station owners do not mark up gas at a fixed percentage. The retail price is marked up by a fixed dollar amount, 10-12 cents. With gas price at $4.50, the credit card charges come to 9 cents, for a meagre profit of 2 cents per gallon.
It is a tough business to be in.
The GDP numbers for 08Q1 was revised to show a 0.8% growth instead of the 0.6% growth. But the growth components still do not show healthy growth. We are not in a recession by the NBER definition, but the higher expectation among consumers for a faster price increase and the anemic growth point to a worser condition, stagflation.
Budget Hero is a Flash based interactive game from American Public Media (the MarketPlace people).
The game lets you play with the multiple levers the Federal Government has and see how the national debt performs. Are you for big Government? big defense spending? tax cuts?
Play the game and see.
I left all the Bush tax cuts alone and played the cards like Cap and Limit Greenhouse gases and increase Federal gasoline tax (yes the 18 cent tax that McCain and Hillary wanted waived). But it is hard to see the macroeconomic impact from the results. Here is mine.
There is really no useful definition for recession. It is decided by the economists at NBER by looking at the GDP numbers for the past two quarters. If the GDP shrank for two consecutive quarters, the NBER declares we were in recession. By this definition, we can only look back and say we were in recession, we cannot say whether we are in a recession or will enter into recession.
So what it means really does not matter for what is ahead of us.
But not to the policy makers from both sides, who either use it do label the current situation or produce every possible explanation for why we we are not in recession. Lazear, White House Economist, has this to say:
“I would be very surprised if the NBER, looking back at this period, would date this as a recession,” Mr. Lazear said. There are even indications that revised first-quarter estimates would be slightly stronger than 0.6%. “The optimists seem to have been closer to right on that than the pessimists,” he said.
While 0.6% is not much of a growth, by NBER’s definition the economy was not in recession. But we should ask what contributed to this growth and how healthy is this growth?
As I wrote before, the growth came from inventory build up. Not a good sign. I believe Lazear realizes this as well as he predicted a flat growth for the next period.
The problem is not whether the economy will shrink or stay flat, the increased inventory is going to cause cut downs in production and will lead to hiring freeze. An increase in unemployment rate is a bigger problem than whether or not NBER should retrospectively label this period as recession.
US economy (measured by real GDP) grew by 0.6% in the Q1 of 2008. With all the dire predictions about slowing economy and recessions, the growth officially indicates that the economy is not in recession. (NBER defines recession as two successive quarters of negative growth).
But the current growth is not good news if you look at the components. My favorite book on Macroeconomics by Mankiw defines national income as
Y = C + I + G + NX
C is consumption
I is private investment
G is Government spending and investment
NX is Net exports
The U.S. Department of commerce report for Q1 2008 gives us the components of the 0.6% growth
Consumption grew 0.68%, Investments grew by -0.7%, Governmental component grew by 0.39% and Net exports grew by 0.22. On the surface it may look like a growth dominated by consumer spending but if you drill down the private Investment growth number, Inventories, an important component of private investments grew by 0.81%. This means manufacturers are storing more of what they produced in the shelves as the consumer demand weakened.
When excess supply over demand goes into inventory, manufacturers are bound to cut production and hiring. This means higher unemployment rate will follow that will lead to reduction in consumer spending and cause the national income to fall.
A growth caused by unexpected build up of inventory is not a good growth. If we take away private inventory growth component, the economy shrank by 0.4%. As the manufacturers readjust to cut production and reduce the inventory, brace yourself for a negative growth and unemployment.
What is a corporation’s role in dealing with countries whose Governments have questionable human rights? Should a corporation be singularly focused on generating shareholder value and spend its precious capital on non-core and non profit generating activities?
Is the economy that generates so much of wealth in the developed countries applicable to even countries that have no democracies or rules of law?
Is the argument to not interfere with the market forces a valid one when the former depends on the existence of democracy and rule of law?
John Ruggie answers (PDF) these in his special report to UN on Human rights.
The root cause of the business and human rights predicament today lies in the governance gaps created by globalization – between the scope and impact of economic forces and actors, and the capacity of societies to manage their adverse consequences. These governance gaps provide the permissive environment for wrongful acts by companies of all kinds without adequate sanctioning or reparation. How to narrow and ultimately bridge the gaps in relation to human rights is our fundamental challenge.