This writing investigates the sources of the macroeconomics conditions in
United States, and use Val-Mart in Mexico and MacDonald’s model to study the
relative importance of different types of macroeconomic impact in terms of
production and operating costs. The identification of the key indicators is
based on the information from the U.S. Federal departments. This finding gives
some empirical support to analyze the impact of the low GDP rate and other
indicators in the perspective of foreign business (Wal-Mart in Mexico) and in
the domestic business (MacDonald). The paper shows the challenge that the
companies are facing to maintain their profits in the macroeconomic situations
that shift the whole demand curve.
Organizations today
face global competition on unprecedented scale. In this scenario the market are
worldwide and are served by multinational corporations as MacDonald’s and
Wal-Mart. These firms are now directed pressure by the macroeconomic events
that influence the whole market and can impact the demand all over the world.
The
growth and expansion of giant firms in emerging markets, many of them
surpassing traditional multinationals from developed economies, shows the
globalizations strategies of many corporation to ramp up sales in developing
markets as China and South America and gain more profit. This is important, as
the structure and competitive conditions of any market are not independent from
the organization, ownership and decisions adopted by firms (Salas 2007, 11).
To
study the expected impact on firms of the two industries – Wal-Mart in Mexico
and MacDonald fast food - this article has used available national statistics
as the main source from which to identify the key indicators from the macroeconomic
conditions in an America economy. The
first part of this paper has been elaborated with comparable indicators related
to: Real and Nominal GDP, National Income, Wage rate, Inventory Levels,
Consumer Price Index (CPI), Price Level, Interest Rates, Currency exchange,
unemployment rate and Business Cycle.
The
second part explores the relationship between the Macroeconomic indicators and
the impact on firms as Wal-Mart and MacDonald’s fast food. With a foreign
perspective we will analyze the impact of the America economy for Wal-Mart in
Mexico and show whether satisfy the profit maximization goal of the company.
For MacDonald we will analyze as a domestic situation in terms of product sales
and operating costs.
1. Indicators of the
macroeconomic conditions:
a) GDP
According
to U.S. Department of Commerce - Bureau
of Economic Analysis – the Real gross domestic product the output of
goods and services produced by labor and property located in the United States
increased at an annual rate of 1.0 percent in the second quarter of 2011, (that
is, from the first quarter to the second quarter), according to the
"second" estimate released by the Bureau of Economic Analysis. In the first quarter, real GDP increased 0.4
percent. However the market value of the nation's output of
goods and services - Current-dollar GDP – increased 3.5 percent, or
$129.0 billion, in the second quarter to a level of $14,996.8 billion. In the first quarter, current-dollar GDP
increased 3.1 percent, or $112.8 billion.
|
Source: U.S. Department of Commerce - Bureau of Economic Analysis
|
b)
National Income
According to Federal Reserve Statistical the Distribution of U.S.
National Income has been
increase from 13002.2 (billions) in the last quarter in 2010 to 13144.5(billions) in
the first quarter of 2011.
c)
Wage Rate
Personal income increased $42.4 billion, or 0.3 percent,
and disposable personal income (DPI) increased $32.5 billion, or 0.3 percent,
in July, according to the Bureau of Economic Analysis. Personal
consumption expenditures (PCE) increased $88.4 billion, or 0.8 percent. In June, personal income increased $27.7
billion, or 0.2 percent, DPI increased $22.6 billion, or 0.2 percent, and PCE
decreased $14.3 billion, or 0.1 percent, based on revised estimates. The report
on National Compensation Survey: Occupational Earnings
in the United States (BLS, 2010), calculate the wage rate based in estimates data from a scientifically
selected sample of workers and establishment characteristics. According this
survey the mean annual earnings estimates in all work levels is about $45,676. However
wage rate that has been growing all over the years on the past few years start
to decrease in 2011.(Source: Social
Security Online)
d) Inventory Levels
The change in real private inventories subtracted 0.23 percentage point
from the second-quarter change in real GDP, after adding 0.32 percentage point
to the first-quarter change. Private
businesses increased inventories $40.6 billion in the second quarter, following
increases of $49.1 billion in the first quarter and of $38.3 billion in the
fourth (U.S. Department of Commerce - Bureau of
Economic Analysis, 2011). As follow:
Table 1.1: Real Gross Domestic Product and
Components
|
|
Share of current-dollar GDP (percent)
|
Contribution to percent change in real GDP
(percentage points)
|
||||
|
|
|
2010
|
2011
|
|||
|
Quarters
|
|
II
|
III
|
IV
|
I
|
II
|
|
Change
in private inventories
|
0.5
|
0.82
|
1.61
|
–3.42
|
1.31
|
-0.23
|
Source: U.S. Department of
Commerce - Bureau of Economic Analysis
e) Consumer Price Index
The Consumer Price Index for All
Urban Consumers (CPI-U) increased 0.5 percent in July on a seasonally adjusted
basis, the U.S. Bureau of Labor Statistics reported at August 18, 2011. Over the last 12 months, the
all items index increased 3.6 percent before seasonal adjustment. The 12 month
change in the all items index remained at 3.6 percent for the third month in a
row. The change in the index for all items less food and energy continued its
upward trend, rising to 1.8 percent in July, with the shelter and apparel
indexes contributing notably to the acceleration. The energy index has risen
19.0 percent over the past year.
f) Price Level
In August 18, 2011 the U.S. Bureau of Labor
Statistics reported Consumer Price Index for All Urban Consumers (CPI-U)
increased 3.6 percent over the last 12 months to an index level of 225.922
(1982-84=100). For the month, the index increased 0.1 percent prior to seasonal
adjustment.
G) Interest rates Real, Nominal
According to the
Federal Reserve in the text “ FRB: H15 Rate paid by fixed-rate payer on
an interest rate swap” with maturity of one year the interest rates in U.S. is the lowest rate over
the past few years, as showed in the table 2:
TABLE 2: Interest Rate
|
Year
|
Interest Rate:
|
|
2005
|
4.04
|
|
2006
|
5.33
|
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2007
|
5.09
|
|
2008
|
2.75
|
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2009
|
0.9
|
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2010
|
0.55
|
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July/2011
|
0.43
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h) Currency Exchange rate, Currency devaluation
The table below was retrieved from the Federal Reserve in the last release about foreign exchange rates and shows the average rates of exchange in 2010 together with comparable figures for other years. In the table is possible to see the depreciation of the dollar against the major of currencies in the world, and the trade weight currencies between 2007 and 2010 the dollars has became more cheap in terms of BROAD.
TABLE 3: Foreign exchange rates
|
COUNTRY
|
CURRENCY
|
2010
|
2009
|
2008
|
2007
|
|||
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*AUSTRALIA
|
DOLLAR
|
0.9200
|
0.7927
|
0.8537
|
0.8391
|
|||
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BRAZIL
|
REAL
|
1.7601
|
1.9976
|
1.8326
|
1.9461
|
|||
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CANADA
|
DOLLAR
|
1.0298
|
1.1412
|
1.0660
|
1.0734
|
|||
|
CHINA, P.R.
|
YUAN
|
6.7696
|
6.8307
|
6.9477
|
7.6058
|
|||
|
DENMARK
|
KRONE
|
5.6266
|
5.3574
|
5.0885
|
5.4413
|
|||
|
*EMU MEMBERS
|
EURO
|
1.3261
|
1.3935
|
1.4726
|
1.3711
|
|||
|
HONG KONG
|
DOLLAR
|
7.7687
|
7.7514
|
7.7862
|
7.8016
|
|||
|
INDIA
|
RUPEE
|
45.65
|
48.33
|
43.39
|
41.18
|
|||
|
JAPAN
|
YEN
|
87.78
|
93.68
|
103.39
|
117.76
|
|||
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MALAYSIA
|
RINGGIT
|
3.2175
|
3.5231
|
3.3292
|
3.4354
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|||
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MEXICO
|
PESO
|
12.623
|
13.498
|
11.143
|
10.928
|
|||
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*NEW ZEALAND
|
DOLLAR
|
0.7216
|
0.6358
|
0.7151
|
0.7365
|
|||
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NORWAY
|
KRONE
|
6.0451
|
6.2908
|
5.6365
|
5.8557
|
|||
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SINGAPORE
|
DOLLAR
|
1.3629
|
1.4543
|
1.4140
|
1.5065
|
|||
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SOUTH AFRICA
|
RAND
|
7.3161
|
8.4117
|
8.2480
|
7.0477
|
|||
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SOUTH KOREA
|
WON
|
1155.74
|
1274.63
|
1098.71
|
928.97
|
|||
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SRI LANKA
|
RUPEE
|
112.990
|
114.909
|
108.298
|
110.620
|
|||
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SWEDEN
|
KRONA
|
7.2053
|
7.6539
|
6.5846
|
6.7550
|
|||
|
SWITZERLAND
|
FRANC
|
1.0432
|
1.0860
|
1.0816
|
1.1999
|
|||
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TAIWAN
|
DOLLAR
|
31.498
|
33.020
|
31.521
|
32.855
|
|||
|
THAILAND
|
BAHT
|
31.700
|
34.310
|
32.962
|
32.203
|
|||
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*UNITED KINGDOM
|
POUND
|
1.5452
|
1.5661
|
1.8545
|
2.0020
|
|||
|
VENEZUELA
|
BOLIVAR
|
4.24
|
2.14
|
2.14
|
2.14
|
|||
|
Memo:
|
||||||||
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UNITED STATES
|
DOLLAR
|
|
||||||
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1) BROAD
|
JAN97=100
|
101.97
|
105.62
|
99.89
|
103.58
|
|||
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2) MAJOR CURRENCY
|
MAR73=100
|
75.36
|
77.66
|
74.40
|
77.94
|
|||
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3) OITP
|
JAN97=100
|
130.61
|
135.91
|
126.83
|
130.28
|
|||
(Rates
in currency units per U.S. dollar except as noted)
h) Unemployment rates
The Regional and state unemployment rates
were generally little changed in July comparing to the last few months. The
unemployment rate reach the highest point in October 2009 with 10.1% and since
then has been decreasing to 8.8 in March of 2011 and now 9.1% as the U.S.
Bureau of Labor Statistics reported in August 19, 2011. According to the same
report twenty-eight states and the District of Columbia registered unemployment
rate increases, nine states recorded rate decreases, and thirteen states had no
rate change. However the 9.1% unemployment rate reported is very high and
represents almost two times more than the percentage in 2006 that was about
4.7%.
j) Business Cycle
Cyclically the US economy is expanding but the growth
rate is significantly slower than in previous post-World War II business cycles
(Ross, 2011). Despite the cyclical upturn the long term slowing of the US
economy because the average growth rate of the US economy is insufficient to
reverse the long term slowdown. The underlying reason for this deceleration remains the decline in US fixed investment.
|
Peak
|
2. The expected
short impact on firms of the two industries:
a) Wal-Mart in Mexico
According
to the indicators above the U.S. economy is growing slow the employment rate is
high that make the demand for Wal-Mart in America shift to the left, from D1 to
D2. In this scenario where the U.S. wage rate is going down and the consumer
price Index (CPI) is going up the Wal-Mart’s inventory levels will increase
because the inventories will not be sold. If this inventory cycle follows the
pattern of those in the past, there is a good chance for Wal-Mart to shift the
demand curve back otherwise Wal-Mart must squeeze their profit and keep the price
low to increase the demand.
However the situation
for Wal-Mart in Mexico is much more favorable where over the last few years under former President Vincente Fox
and now under President Felipe Calderon, Mexico has developed a dynamic foreign
policy and become a more active partner in multilateral affairs, climate
change, human rights and regional issues (Datamonitor, 2010). Furthermore, Mexico
maintains excellent relations with its North American Free Trade Agreement
(NAFTA) partners, which create a very good situation for an increase of the
Wal-Mart’s investments in this country.
Even knowing that
Mexico is facing an unprecedented increase in drug-related violence, according
to Datamonitor (2010) the economy growth rate is expected to be around 3% in
2010 and reach over 4.5% by 2013 much better than in U.S. where the economy
growth rate has been growing less than 1% (U.S. Department of Commerce - Bureau of
Economic Analysis, 2011).
According to the
Datamonitor report (2010) foreign investment policies in Mexico have been
simplified in the country by amending relevant regulations and reducing legal
and administrative bureaucracy. Also with the currency exchange rate in a
process of devaluation where the dollar can be exchanged for fewer units of
another currency, and the Mexican’s pesos can be exchange for more units of
dollar. Wal-Mart can take advantage of these policies and currency situation to
use their knowledge to transfer goods from U.S. to Mexico with a very
competitive price. Then will be possible to reduce their operating costs and decrease
the price of the goods in Mexico increasing the demand and maximizing the
profit.
b) MacDonald’s fast food
The Bureau of Economic Analysis now pegs last quarter's growth in real
gross domestic product at only increased at an annual rate of 1.0 percent in the
second quarter of 2011, well
below the 3.5% advance originally reported. Business inventories, which had
grown by $49.1 billion in the first quarter, after adjusting for inflation,
subtracted 0.23 percentage point to $40.6 billion in the second quarter. That
slowdown caused a subtraction from GDP growth of 1.4 percentage points, instead
of only 0.7, as the BEA first estimated. Then with the personal income increasing only 0.3 percent, and the
consumer price index increasing at 0.5% the American consumers are losing the
power of consumption. Therefore not even the interest rate as the lowest from
the past ten years is sufficient to improve the demand. To get worse the U.S. business cycle is
growing slowest as possible and the inventory levels are increasing with all
the goods that companies can’t sale.
In this scenario we
would expect a difficult situation for MacDonald with a decrease in sales and
struggling for profits. However MacDonald’s fast-food has been considering as a
cheap alternative to sit-down meals. The success is given because McDonald's president
and chief operating officer. Mr. Alvarez, 53 years old, has helped the Golden
Arches extend a six-year success streak with his focus on improving restaurant
operations, adjusting prices and keeping down costs (Adamy, 2009). The right
strategy reflect straight in their net income that in has been growing
constantly over the past few years.
Therefore cutting costs
is not a sustainable model, especially when the economy is expanding in slow
rates. At the same time the currency situation with decline in dollar will
probably prompt MacDonald business to shift towards emergent markets. The
domestic demand is decreasing and not even MacDonald’s happy meals will be
enough to keep the demand at the same level.
The immediate impact
for MacDonald is losses in profit to maintain the same quantity demand
especially because their focus is to adjusting prices they don’t want to lose
demand they are more apt to decrease the price and squeeze the profit margins.
3. Conclusion
The latest figures on
economic growth released by the Bureau of Economic Analysis (BEA) are bad. Yes,
GDP growth has surged to low rates, but the contributions of investment,
government expenditures, and net exports are almost nigh. Personal consumption
expenditures have added some percentage points to growth, down from 2
percentage points in the third quarter. (See Figure1.1) One of the largest
contributions comes from the change in private inventories, i.e. the variation
in the stockpiles of goods that businesses store. An increase in inventories
adds to GDP, because those are goods that are produced but not sold, and
therefore not included in expenditures; a decrease in inventories, on the other
hand, must be subtracted from growth, because those goods were already counted
in GDP at the time they were produced. We can concur that only a reversal of the underlying decline in US fixed investment would be
sufficient to halt this slowing of the US economy.
However
as Denis Hennequin, president
of McDonald's Europe said:"It's a feeling that self confidence is our
worst enemy" (Adamy, 2009). Denis Hennequin is right because one of the
most important actions to revert the economy now is increase fixed investment
although the companies are afraid to do it. Therefore U.S. government is
providing the best situation for these by decreasing the interest rates as low
as possible since 2007 the companies still not confident to invest and create
jobs in America. This happened in part because the situation abroad is not so
bad, actually most emergent countries is facing an spectacular growing rates
and they now play an important role in the global business strategies. Where
each company can entry easily then before and take their advantages to create a
new demand and increase their profit globally. In this scenario companies as
Wal-Mart and MacDonald’s have an amazing power because they can invest and
create a lot of jobs and enable the economy to grow, wherever is profitable for
them.
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