Economic Factors affecting Business Environment

FED
The Federal Reserve System (also known as the Federal Reserve or simply the Fed)
is the central banking system of the United States.
created on December 23, 1913, with the enactment of the Federal Reserve Act.
ECONOMIC FACTORS

Interest Rates

Foreign Exchange

Recession

Inflation

Demand & Supply

 THE GREAT RECESSION OF USA

The United States entered a severe recession in 2008.

The National Bureau of Economic Research (NBER) dates the beginning of the recession as December
2007.

According to the Department of Labor, roughly 8.7 million jobs were shed from February 2008 to
February 2010, and GDP contracted by 5.1%, making the Great Recession the worst since the Great
Depression.

Unemployment rose from 4.7% in November 2007 to peak at 10% in October of 2009

More than 170,000 small businesses in the U.S. closed between 2008 and 2010, according to analysis
by the Business Journals of U.S. Census Bureau data.
 Companies subjugated to Bankruptcy

TRIBUNE CHRYSLER LEHMAN Brothers

(Apr 30, 2009) (Sept 15,2008)
Taken private by Pushed into Its collapse was the
billionaire Sam Zell in bankruptcy, enlisted largest corporate
2007, driven into Fiat and Sergio bankruptcy in U.S.
bankruptcy less than a Marchionne to be history. Its assets are
year later and wound partners ,revived the now part of Barclays
up car company. Capital
Number of U.S. household properties subject to foreclosure
 THE GREAT RECESSION OF USA

Entrepreneurship plunged during the recession.

The formation rate of new businesses went down in 2006, in the lead-up to
the recession, and started to increase in 2007 before spiking in 2008. It hit
its peak in 2009, when the rate was 17 percent higher than it had been
three years before.

Many who were laid off during the recession started small businesses
because they had no other choice.

18% of entrepreneurs that launched their own business in the last 12

months have done so after losing their jobs, which is double the rate before
the recession, according to a recent poll by WaveAccounting .
Founded in 2008,Delphix has raised $45.5 million from Greylock Partners,
Lightspeed Venture Partners and others. As conditions improved, companies
that survived benefitted from having fewer competitors. And Delphix still dont
have any direct competitors.

Founded in 2007,Smashburgers No. 6 ranked company did $228 million in

revenue in 2013. Real estate was more affordable during this time, so we were
able to take advantage of better economics said Scott Krane , CEO of
Smashburgers.

As businesses were shutting down and liquidating, we took advantage and

purchased all of our office furniture and equipment at dirt cheap prices, said
David Allerby, CEO of 24Hr HomeCare , a rapidly expanding in-home elderly care
business.
 INFLATION

Inflation is the rate at which the general level of prices for

goods and services is rising and, consequently, the
purchasing power of currency is falling.
To help keep inflation manageable, the Fed watches
inflation indicators such as the Consumer Price Index (CPI)
From 2001 to 2002, when the Fed cut the federal funds rate
to 1.25%,it greatly contributed to the economy's 2003
recovery. By raising and lowering the federal funds rate, the
Fed can prevent runaway inflation and lessen the severity
of recessions
The latest inflation rate for the United States
is 1.5% through the 12 months ended September 2016, as
published by the US government on October 18, 2016.
 Impact of Inflation on Industries

The petrochemical industry has suffered due to increase in the cost of petroleum-based raw materials and rising
transportation costs. DuPont announced a 15% drop in net income in the most recent quarter as a result of the rising
cost of supplies. The company stated that raw material costs were up 6% for 2010 from 2009

Many companies within the consumer products industry had deteriorating earnings in the last quarter. For the
quarter ended December 31st, 2011 Procter & Gamble posted a profit of $3.33 billion, down from the $4.66 billion
posted a year prior..

The average price of regular gas is $3.171/gallon, compared with $2.648/gallon one year ago. This increase has had
significant impact on shipping companies. These companies are also plagued by the same jet fuel issues as the
airlines. On January 3, 2011, FedEx increased its shipping rates on ground and home-delivery services by an average
4.9%.
 INTEREST RATES
Interest is the amount of money that lenders earn when they make a loan that the borrower repays.

The interest rate is the percentage of the loan amount that the lender charges to lend money.

To help keep inflation manageable, the Fed watches inflation indicators such as the Consumer Price
Index (CPI). When such indicators start to rise more than 2-3% a year, the Fed will raise the federal
fund rates to keep the rising prices under control. Because higher interest rates mean higher
borrowing costs, people will eventually start spending less. The demand for goods and services will
then drop, which will cause inflation to fall.

An example of this occurred between 1981 and 1982. Inflation was at 14% a year and the Fed raised
interest rates to 20%. This caused a severe recession, but it did put an end to the spiralling inflation
that the country was seeing

Another example of this occurred from 2001 to 2002, when the Fed cut the federal funds rate to
1.25%. This greatly contributed to the economy's 2003 recovery.
 During the 2008 recession period, Fed felt it needed to pull out all of the stops to prevent the economy
from collapsing into a new Great Depression. One way of keeping things afloat was by cutting the cost of
borrowing to rock-bottom levels. Thats why rates in the US been held so low for so long.
 DEMAND & SUPPLY

The law of supply and demand affects monetary policy in the

United States through the adjustment of interest rates.

They are the preferred tool for central banks to expand or

decrease the money supply.

When interest rates are lower, more people are borrowing

money. This expands the money supply; there is more money
circulating in the economy, which translates to more hiring,
increased economic activity.

Raising interest rates leads people to take their money out of

the economy to put it in the bank and take advantage of an
increase in the risk-free rate of return. This tends to decrease
economic activity and put a damper on asset prices.
 DEMAND & SUPPLY

The law of supply and demand primarily affects the oil industry by determining the price of oil. For
example, extended periods of high oil prices lead to consumers shunning vehicles that are not fuel
efficient, thus reducing their driving. Businesses and individuals may pay more attention to conserving
energy due to its cost. These factors reduce demand.

On the supply side, high oil prices lead to more drilling projects; more research money pours in and sparks
innovation in new techniques and efficiencies; and many projects that were not viable at lower prices
become viable. All of these activities increase supply.

An example of this circumstance was seen between 2007 and 2014 when oil prices were above $100 for
the most part. Massive investments poured into the sector via credit and new companies. Production
increased in response to high prices.

As an another example, In 2011, Pepsi-Cola-350ml has increased the price from $0.92/can to $1.00/can
in USA and the demand has decrease from 150 million to 145 million.
 Foreign Exchange Rate

Foreign exchange is the exchange of one currency for another or the

conversion of one currency into another currency.

An unduly strong currency can exert a significant drag on the underlying economy over the long term, as entire
industries are rendered uncompetitive and thousands of jobs are lost.

While consumers may disdain a weaker domestic currency because it makes cross-border shopping and overseas
travel more expensive.

Foreign currency exchange rates of AMAZON negatively impacted net sales by USD 636 million, USD 1.3 billion,
and USD 854 million for 2014, 2013, and 2012 respectively.

North Chicago-based Abbott reported in 2013 that first-quarter revenue growth of 3 percent would have been 7
percentage points higher but for the impact of foreign exchange.

McDonald's 11 percent drop in first-quarter consolidated revenue would shrink to just 1 percent in "constant
currencies," the Oak Brook-based company said on 22nd April 2015.
 Here's how strong dollar hurts US Companies

Kimberly-Clark sells a lot of Huggies diapers all around the world. However, it reported
that its 2015 revenues were down by 6%. Worse yet, it warned Wall Street that its 2016
revenues would fall by another 3%.

Procter & Gamble gets 60% of its revenues from outside North America, so it is one of
the most vulnerable companies to a rising US dollar.
The company reported a 9% drop in quarterly revenues to $16.9 billion because of
dollar in 2015.

Johnson & Johnson said its revenues were reduced by 7.5% in 2015 by currency loses.

DuPont (Chemical Company), sales dropped 9.3% in 2015 and the strong dollar is to be
blamed.
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