This Ellen Show segment with Dennis Quaid at Starbucks was hilarious. Afterwards, for an economic life connection, we can relate it to consumer spending.
Starbucks just reported its second quarter fiscal year 2013 earnings and said that their US customer traffic was up. When Starbucks refers to more sales, we can think of the single store that the Ellen Show visited or the 11,100 cafes it runs in the US. We can then step beyond to the 2.5% increase on an annualized basis of the US GDP. Representing close to 70% of the GDP, consumer spending for services and goods like those produced by Starbucks has been the fuel that propels US economic growth.
From the St. Louis Federal Reserve
Sources and Resources: For more on Starbucks’ earnings, you might enjoy a transcript of their conference call or this Bloomberg summary of their 2nd quarter results. As a complement, the St Louis Fed consumption expenditures graph (above), the GDP press release and this summary provide a broader view.
Earning from $100,000-$250,000, the Henrys are in the top 20% income bracket and do 40% of all consumer spending. Patrons of Tiffany and Target, Pottery Barn and Lululemon, they support “accessible luxury” stores.
By 2010, after the Dec. 2007- June 2009 recession, the ultra affluent, the top 2%, had started spending again. Soon after, the Henrys joined their upper echelon cohort but it might not last. Now, high end car dealerships say the $190,000 Morgan Aero Supersport and the Lamborghinis are moving but not the used (pre-owned?) Jaguars. With worries over European sovereign debt, banks, and the tepid June employment report, the Henrys feel less confident. With less confidence comes less Henry spending because they do not have the permanent wealth that provides a buffer.
Most economists believe that consumer spending accounts for 70% of GDP. For unemployment to plummet and growth to soar, the Henrys need to spend.
One last acronym:
Sitcom: Single income, two children and oppressive mortgage.
I learned about Henrys from this Bloomberg article, heard more from Marekplace.com and then checked business cycles stats at NBER here.
Looking forward to your daily Double Chocolaty Chip Frappuccino, you see that the calorie count sign says 500 calories. Change your mind? Most studies indicate that knowing a calorie count has little if any impact on purchasing decisions.
Then, you stroll to your local Whole Foods to pick up some fruit juice flavored carbonated drink. Defined by legislators as sugary, the beverage’s price includes a 7% “soda” tax. The 7% extra does not dissuade you from making your purchase. Researchers have concluded that the threshold is a penny an ounce tax. Any less and people still buy.
Next stop, the doctor’s office where you happily notice that those thick folders of paper records are gone. The practice has fully digitized and now will save all of us money by following the cost saving precepts of the Affordable Health Care Act. Yes? Maybe not. One study from Harvard says that physicians who have fully digitized tend to order more medical tests, thereby increasing costs.
Mandating calorie count information, taxing sugary drinks and digitizing health records… each is supposed to pull down health care spending. But they might not work.
The Economic Lesson
Stanford University health policy expert Victor Fuchs says we need massive policy change to depress health care spending that averages $8000 a person, double Europe’s average. Why so high?
Too many specialists.
Equipment with excessive “standby capacity.”
Inadequate support for the poor who are chronically ill.
A NY Times bubble interactive for President Obama’s 2013 budget shows perfectly where health care spending is going. Look at the 8.4% increase Medicare and Medicaid.
An Economic Question: Would you support Dr. Fuchs’s solution of a dedicated value added tax that funds universal coverage?
Although gasoline prices are rising, consumers have not altered their driving habits. Economist James Hamilton suggests that the tipping point tends to be when prices exceed the highest point during the past 3 years. That number is $4.11 or $4.27 if we account for inflation.
Currently, the average price per gallon of regular in the U.S. is $3.72 while Wyoming has the cheapest gas at $3.16 and California has the most expensive at $4.33.
Looking beyond our borders, though, $4.33 can seem pretty low. For these countries, fuel taxes elevated prices. (March 2011 data)
Istanbul, Turkey: $9.63
Oslo, Norway: $9.27
Athens, Greece: $8.50
Amsterdam, Netherlands: $8.01
On the other hand, subsidies can make the price per gallon of gasoline pretty low:
Caracas, Venezuela: $.06
Riyadh, Saudi Arabia: $.45
Doha, Qatar, $.88
For 170 countries, these graphs are ideal except that the data is for 2010.
Finally, where are we historically? Going way back to 1919 when the price of gas was close to 25 cents–the equivalent today of $3.35–this graph provides a fascinating picture of where gas prices have been. At all time highs now, real prices were slightly lower when they peaked during 1981 and 2008.
The Economic Lesson
Observing the impact of gasoline price swings on consumer purchases, economists cite our elasticity. If price changes a lot and the quantity we buy remains almost the same, as with medication, then our demand is inelastic. By contrast, if price changes have a big impact on buying, then our response is elastic.
An Economic Question: If, at $4.11 per gallon, we start to buy a lot less gasoline, then how might you use elasticity to describe the change in our buying decisions?
Starting with, “…eating and clothing ourselves is getting easier all the time,” an Atlanticarticle discusses “cheap” and “expensive.”
toasters, washing machines, other manufactured goods
home energy: electricity, natural gas, oil
homes and apartments
Briefly stated, “productivity divergence.” To be discussed tomorrow.
The Economic Lesson
We can define “cheap” and “expensive” by looking at household spending. Cheaper items require an increasingly smaller proportion of our income. Food and clothing are the perfect example. 90 years ago, households used more than one-third of their spending for food and clothing. Now, according to the BLS, the total is closer to 15% for a family earning $62,000 before taxes.
An Economic Question: How does income relate to what we define as cheap and expensive?