Economics News Blog
In this blog I write about newspaper stories that relate to topics I teach in my economics courses. Sometimes, the articles are clearly about economic policy, but sometimes the articles are on subjects as strange as peanut butter. I decide to write about a news story and its applications of economics when I find that some economic theory can bring some more light to an issue. I might also choose a news story if it helps bring some economics to life. Many of these blog entries are mine, but on occasion some may be submitted by my economics students, or co-authored with them.
Disclaimer: I am a professor of economics but I make no claim that anything I write in this blog is correct. Do not cite without permission.
Saturday, February 21, 2009
"Wal-mart Forecasts Gains as Rivals Stumble," by Karen Talley and Ann Zimmerman, Wall Street Journal, February 18, 2009.
Wal-mart appears to being doing well despite economic recession hurting businesses nationwide, including some of Wal-mart's competitors like Target and Costco. Wal-mart reported a 1.7% increase in quarterly sales, and its chief financial officer predicts its earnings per share will rise by 6% during 2009.
The United States currently has high and growing unemployment as the country continues to suffer with an economic recession. According to the Bureau of Labor Statistics, in January unemployment grew from 7.2% to 7.6%. This number alone does not reveal the extent of economic hardship. Businesses across the country are handing out smaller and fewer raises, and many businesses, especially those in the service sector, can cut down on labor costs by cutting hours, causing lower incomes for hourly employees.
As a consequence of lower incomes, demand for many types of consumer goods have decreased, but not so much for many of Wal-mart's goods. Economists refer to these types of goods as inferior goods. The term may be unjustly cruel, but it simply refers to goods whose demand increases when a consumer's income decreases. As a result of lower incomes, people have made their dollars go farther by foregoing some of their usual purchases and shopping at Wal-mart instead. For example, instead of eating out so much in restaurants, people are buying more of their food from Wal-mart. Instead of buying as much fashionable brand-name clothing, more people are buying the less expensive clothes at Wal-mart. Even goods that economists do not consider to be inferior goods may be selling well at Wal-mart. For example, the article mentioned that Wal-mart is bringing in more brand-name electronics to attract "affluent consumers" who nonetheless are worried about declining incomes. When people think of inferior goods, they often think of goods like used clothing and Ramen noodles, not flat panel giant screen televisions. Indeed, I did not purchase my first big flat panel TV until my income increased with first well paid steady job. However, for those consumers who are seeing high incomes becoming somewhat smaller, it may now be more attractive to buy a fancy TV from Wal-mart, instead of a very fancy TV at places like Best Buy or Sharper Image.
Of course, not all of Wal-mart's goods are inferior goods. If the recession deepens, Wal-mart's success with its inferior goods may not offset a decline in its other sales. Moreover, when the United States pulls out of this recession and incomes start rising again, I would expect Wal-mart will be enjoying growth in its sales along with its competitors.