Economic Overview of the United States.

The economy of the USA is the leading economy of the world. USA is in the expansion phase. US economy is leading towards expansion and prosperity in every possible way. The economists suggest that GDP of US will expand as much as 2.8% in 2018 and near 2.5% in 2019. The economy of US has technological advancement, such as nuclear weapons, automobiles, machinery, IT etc. There are number of characteristics that boost the economy of a country. The country has now access to several natural resources and built high construction buildings. Apart from this, full human input is there which supports the market and help it grow; the business is well organized (3)

The government makes policies which are helpful, design functional legal system, provide political stability and give a functional environment to business. The economy growth is flourishing because of human input and government interest. The reason US economy is growing every day is because of research, great investment and innovation. Unemployment has been recovered in past few years due to efforts of government by introducing new projects which provided job opportunities to its unemployed people.

US is in phase of expansion but they can enter in phase of contraction. If the country fails to maintain its current status this may take their leading status away. The economy growth of US is highly influenced by high growth rate of trade. It is consistently growing day by day. U.S is known to be second largest exporter and leading importer of the world. US depend upon oil from foreign countries to meet its demand of energy and resources. Therefore it has good trade relations with several countries. It is an active participant of World Trade Organization i.e. WTO (3)

Economic Overview of China:

After USA, China has great effect on global economy. It is the second leading global economy of the world. The GDP is almost 10%. From 1978, China’s economy has shifted its framework and now has become more market based. The economy grew fastest among the race. It gave employment to unemployed individuals and brought out nearly 800 million people out from unemployment and poverty. China has majorly contributed to Millennium Development Goals. The population of China is 1.3 billion but it is still growing like never before. It has very important imprint on international development and growth economy. China has stunned many countries with their hard work and position in global market (4)

Fast economic growth has been impressive but it gave birth to some problems like inequality, environmental factors, rapid urbanization, other imbalances etc. With development of economy balance should also be maintained. The transition chart provided by China shows that transferring from middle income to high income is more difficult than moving from low income to middle income. China is the world’s largest exporter and manufacturer of every kind of goods. It is the second greatest importer in the world. It is the biggest trading nation and plays major role in trading market.

 In 2001, China became member of World Trade Organization. In order to protect the environment and economy it is made sure that C emission is controlled. It is one of the most populated lands in the world. Domestic market is the largest contributor of agricultural products. 10% of GDP is from agricultural sector. China is rich in natural resources. It is the largest electricity producing company. It has resources like coal and oil which are responsible for producing energy. China is also known as, “The Workshop of the world” (4)

Economic Overview of Japan:

Japan is the third largest developed economy of the world. The growth slowed down in recent years. The natural disasters affected the economy growth. Japan has less natural resources so it mainly depends upon import for necessary materials like coal and oil and to produce energy and run the country. 11% region of Japan is suitable for agriculture. Crops and tea are largely produced agricultural products of the company. Agriculture contributes only 1% to GDP.

Industries of Japan produce steel, paper, automobiles, renewable resources etc. The growth of the company is due to its research. 29% of GDP is supported by industries while workforce contributes 26% to it. This country has several mountains and volcanoes which means earthquakes which cause natural disasters (5)

Economic Overview of Germany:

Germany is the fourth in row of leading countries. The economy and social market of Germany is highly developed. European Union was formed by Germany. It is the third largest exporter of goods in the world. Industry contributes 29% to the GDP; agriculture contributes about 0.9%, 41% is from export. It is the largest manufacturer in the world. Germany has natural resources. It has renewable resources. The economy is unfortunate because of lack of investment.

Germany is highly populated country. Economy of Germany is the fifth biggest economy. Due to lack of investment in country the government plans to invest 15 billion Euros in country 2016-18.

Country has nuclear power but plans to replace it with renewable resources to contribute to better environment and healthy economy (6)

Economic Overview of the UK:

UK is most developed and it is oriented with several types of markets.  This country is stable and offers several chances for financial raise and business. It can be called as hub of business. The country has the strong economy, one of the biggest manufacturers. 21% is contributed to GDP by manufacturing sector. 1% is contributed by agriculture. Service sector’s contribution is about 80%.  Country has many natural resources which are declining over the course of time. The tourism supports the economy. It comes 8th out of top ten tourist destination in the world (7)

Summary of the Global Economy:

When global economy was studied it was found out that there are several barriers and the economy of many countries is suffering. Some economies are prospering and growing every day. There are many ways in which an economy can suffer. Inflation, lack of resources, lack of investment and tourism, agriculture, exchange rate etc. are the contributing factors. Germany and UK are countries who grew rapidly in an economy while Japan and china were slow but still China made it to second largest economy of the world.

Trade, import, export, market, relations with countries, infrastructure, research etc. play major role in development of an economy. These things clearly state the factors which greatly contribute to the economy of a country. When any difficulty arises such as poverty, unemployment, no or less investment so the government initiate projects to eradicate such reasons and try to make policies and take steps which are helpful to make economy of a country strong and better.

Domestic Economy

The Beige Book published in August 2018 by the Federal Reserve reported that the economy has been growing overall at a moderate pace. Of the twelve districts, only three indicated somewhat below average growth. (8) Consumer spending continued to grow since their last report, as well as tourism, manufacturing, transportation, home construction activity on balance. Home sales were somewhat softer since the last report and commercial real estate construction was mixed. (8) Some districts made note of weakness in agricultural conditions and uncertainty of trade tensions. Trade tensions currently have prompted some business to postpone or scale back capital investment. (8) The labor markets are still considered to be tight throughout the country with most districts reporting widespread shortages. (8)

In the September 28, 2018 publishing of The Value Line Investment Survey Selection & Opinion begins with "A spirited economic advance appears to be securely in place, even as a few soft spots being to surface". This statement cites job growth, non-manufacturing activity and housing starts showing notable strength while a slippage in exports, lesser improvement in manufacturing output, and a steadying in retail spending leveling out the economy. It is also noted that uncertainty looms with the upcoming midterm elections and the power shift that may occur impacting economic policy. (9)

Leading Indicators:

In the six-month period ending August 2018, the leading economic index increased 2.5 percent, slower than the growth of 3.8 percent over the previous six months. (10) Since January 2016, we have seen a steady fluctuation in average weekly hours of production workers with an overall increase in 0.4 weekly hours since January 2016 to August 2018. (11) In the week ending September 15, 2018, initial unemployment claims reached their lowest November 15, 1969. (12) Manufacturers' new orders for nondefense capital goods have been trending up steadily since May 2016 with an overall increase of 10,582 as of August 2018. (13) Manufacturers' new orders for durable goods have steadily increased since the 2008 recession. (14) New privately owned housing unit starts have risen steadily since the 2008 recession as well. (15)

The yield curve slope since April 2018 has been relatively flat indicating a possible economic downturn. (16) As of September 2018, the Consumer Confidence Index stands at an 18-year high of 138.4. Consumers believe that current conditions are extremely favorable due to the strong economy and robust job growth. These historically high consumer confidence levels indicate consumer spending should remain high for some time. (17)

Coincident Indicators:

Total nonfarm payrolls have increased steadily and relatively equally since 2010 as well as personal incomes in general. (18, 19) Disposable Personal Income has increased steadily since 2010 alongside a growth in personal consumption expenditures. (19, 20) Industrial production and manufacturing and trade sales were down between December 2017 to January 2018 but have been on as steady rise since January 2018. (21)

Domestic Economy Summary:

Based on the resources used to examine the state of the United States economy, it would appear that the economy is arriving or is very close to approaching the peak of the business cycle. With three districts that report to the Fed reporting below average growth and the leading economic index slowing in growth it can be seen that the economy seems to be cooling down from the expansion we have been seeing since 2008. In September of 2018, an unusually light volume was seen in the stock market indicating that investors are seemingly more cautious to buy into the market when stocks are continuously reaching all time highs (22). With these different indicators, it is indicated that growth will continue to slow in the coming years.

2. Industry Assessment

In keeping with this notion that the U.S. economy is approaching a peak, under this business cycle the question turns to which industries are poised for success? Historically, some industries that are higher risk tend to underperform and temper high expectations. (23) Chief Financial Analyst, Stephen Simpson say, “Biotechnology stocks are notoriously risky, between 85%-90% of all new experimental drugs will fail, and, not surprisingly, most biotech stocks will also eventually fail.  As Stephen Simpson said, 85-90% of drugs fail, and this is under favorable economic conditions, after the economy reaches a peak, investments decrease, and risk increase. Thusly, as an economy sees a peak at the horizon, it would be wise for an investor to make more conservative investments that would maintain a stable, if not, high performing return under a peaked business cycle. Some examples include Utility sectors of the economy, consumer staples, food industries, and healthcare. Regardless of the economy, people will spend money on gas and power, whether it is power for their homes, or gas for transportation, neither of these costs decrease regardless of the economy. By contrast, typically, luxury goods, or non-essential goods tend to see stagnate sales under a peaked economy, if not worse. A wise investor may see publicly traded biotechnology companies, as a risk not worth taking when the economy is on the precipice of decline. A way to minimize risk while maintaining an appealing reward may be to turn to the utility sector, or even the consumer staples sector. This industry is comprised of essential goods. These may include food, beverages, cleaning supplies, in summation, consumer staples are products you use and see every day. For investors finding themselves in an economy reaching a peak, this industry would be attractive. Consumer staple stocks provide steady growth, dividends, and most importantly, low risk and low volatility. In other words, with this industry you get steady cash flow and returns regardless of the business cycle. furthermore, under a peaked business cycle and trough, they tend to outperform other industries and stocks. For the wise investor seeking to invest in stocks, consumer staples industry may be the type of stocks to indulge in.

3. Security Selection High-Level

There are many companies in the consumer staples industry. Stocks can range from small to large cap size. Small to Mid size cap stocks within the consumer staples industry tend to operate within just of few segments of the industry. The products they offer may only apply to one segment. For example, one small-cap stock may be a company that offers strictly baked goods to consumers. A mid-cap stock may be a company that offers a variety of makeup products. There are considered to be four main players at the top level. The Procter & Gamble Company, Unilever, The Clorox Company and Johnson & Johnson are considered to be four of the largest companies in the consumer staples industry that offer a wide variety of products to consumers. These four stocks are considered to be large-cap stocks and operate in multiple segments of the consumer staples industry with high-barriers to entry. There is the opportunity for a smaller company to work their way up the food-chain to compete with the largest players, however, this would require years of revenue growth and major acquisitions (which you would most likely need to compete with larger companies for) to grow to a comparable size of the larger companies within the industry.

Below is a chart comparing common metrics of four large companies within the consumer staples industry (Data from Mergent Online Resource via Criss Library).

4. Security Selection Specific

 ( PG Value Line Report 9/21/18)

When considering all relevant factors among competing firms, we can see Procter & Gamble outperform other firms. For instance, Procter & Gamble’s price earnings ratio outperforms competing firms such as Unilever. Looking at historical data and future projections, this trend does not seem to be declining any time soon. From fiscal year 2017 to 2018 there was an increase of $472 million in net profit, and an increase in net profit margin that now stands at 16.8% and projected to increase to 19.5%. Furthermore, return on total capital also saw an increase from 14.9% to 15.5% and projected to increase to 17%. We also saw an increase in earnings per share from 3.92% to 4.22% and projected to increase to 6.5%. This is significant considering this will provide investors with higher earnings for their investments. Furthermore, during an economic peak, historically, consumer staples outperform stocks in other industries; so, we can consider these figures to be conservative projections relative to firms in other industries. When considering these factors, we can see that Procter & Gamble outperforms competing firms; and during an economic peak we expect Procter & Gamble not only to outperform competing consumer staple stock, but also outperform firms in other industries.

5. SWOT Analysis of The US industries

Strengths:

The US industries is continuously growing that is a major strength. The American are generating the almost 20% of the whole world income. The industry provides variety of products that are the basic need of the people. Procter and gamble is the leading company in the market as Staple industries (24). The industry is showing high profitability that provides strength to the industry to deal with the competition. The price earnings ratio is getting increases every year. They offer a variety of products.  Net profit and earning per share of the Procter and gamble is increasing. Industry is outperforming in accordance to the historical data. The well managed operations and profitability of the industry is strength and competitive advantage in the market.

Weaknesses:

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Opportunities:

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Threats:

The highly competitive market is a threat. New industry are entering in the market that are threat for the business of large industries (26). Fluctuation in the value of the dollar is a threat for the industry. The value change also causes to change demand of the products.

6. Risk Assessment

Assessing the operating leverage of Procter and Gamble must be considered when looking into business risk. Using data from Mergent Online (27), we see that the degree of operating leverage for 2017-2018 is 2.21. Currently, Procter and Gamble has a very low degree of leverage. In previous years the degree of operating leverage was relatively higher. This is due to a larger variance between Procter and Gamble's the percent change in sales and EBIT for the two years. In previous years, the degree of operating leverage was relatively higher due to a decline in sales. More recently, Procter and Gamble made a slight gain in sales in 2018 compared to 2017 reversing the trend of the previous years. This slight gain was not substantial leading to a smaller degree of operating leverage.

Procter and Gamble's degree of operating leverage for 2018-2017 when compared to its competitors seems relatively normal. Please see the images below for the degree of operating leverage for Johnson & Johnson and Clorox (27).

As you can see, the DOL for Clorox and Procter and Gamble is very close to the same. Clorox also saw in increase in sales over that period. Johnson and Johnson has a relatively high DOL when comparing to Procter and Gamble.

Currently, if Procter and Gamble's DOL were to remain low, this would be beneficial to their business risk. Sales have not had a major fluctuation since 2015-2016, staying consistently around 65-66 million with a slight increase in 2018. If Procter and Gamble manages to keep their fixed costs low, lower sales will have less of a burden on the company due to their lower DOL. A lower DOL will result in less business risk for Procter and Gamble and would be less susceptible to changes in the business cycle.

Since the DOL of Procter and Gamble is relatively low, they will be more attractive to creditors as they should be less risky in being able to pay off their debt in times of lower sales. If the business cycle were to change into a downward turn or recession, creditors would be confident Procter and Gamble would pay off their debt. Below is a comparison of the debt to equity and debt to asset ratios of Procter and Gamble, Johnson and Johnson and Clorox (27). Of the three companies you can see that Procter and Gamble does not have unfavorable ratios. When comparing to Clorox and Johnson and Johnson you can see that Procter and Gamble’s debt to equity and debt to assets ratios are more favorable. Procter and Gamble has relatively more assets to debt than their competitors.

7. Management Assessment

In assessing management, Phillip A Fisher prescribes 15 considerations in his book, Common Stocks and Uncommon Profits.  In assessing Proctor and Gamble’s management, below are five considerations prescribed by Phillip A Fisher.

Does the company have products or services with sufficient market potential to make possible a sizable increase in sales for at least several years?

Does the management have a determination to continue to develop products or processes that will still further increase total sales potentials when the growth potentials of currently attractive product lines have largely been exploited?

How effective are the company’s research and development efforts in relation to its size?

Does the company have a short-range or long-range outlook in regard to profits?

Does the management talk freely to investors about its affairs when things are going well but “clam up” when troubles and disappointment occur?

The first consideration is one that P&G has proven to actively engage in. Through acquisitions, P&G selects brands with great market potential, acquires them, and stimulates sales growth. Some skeptical investors may question if P&G’s acquisitions are a tactic to inflate growth, to that end I would point to P&G’s model, which revolves around acquiring and growing companies. P&G’s finance chief Jon Moeller, responded to P&G’s strongest sales growth in five years by saying, “the most defining difference was simply the number of businesses that were growing, and that reflects the implementation of our strategy. (28)”  Procter & Gamble has been “working on productivity, making better packaging and creating more products that solve consumers’ problems and are convenient,” according to Mr. Moeller. Procter & Gamble not only stimulates sales growth of newly acquired brands and products, but continuously reinvents and reinvigorates existing brands. For example, Procter & Gamble first introduced Tide laundry detergent 72 years ago in 1946. It is estimated that Tide holds 14.3 percent of the global market share. Most recently, Tide Pods, Tide detergent in new smaller packaging, was among the company’s fastest growing products in this recent quarter. This is evidence that management is determined to continue to develop products and processes to increase sales of largely exploited brands. This is a perfect exhibition of how effective Procter & Gamble’s research and development is and how their investments in research has paid off. Last year alone, Procter & Gamble spent just over $2 billion in research and development (29). Whereas, their competitors Unilever, just spent $1 billion, and Kimberly Clark who just spent $640 million. Regarding profits, Proctor and Gamble have clearly demonstrated that they are interested in long term profits through brands they have managed for a long time such as Tide, Gillette, and Johnson & Johnson. Furthermore, in their letter to shareholders, they mention how management is focused on “organic sales growth,” this shows that Proctor and Gamble is less interested in playing with the numbers to display artificial performance. In their annual reports, management speaks clearly and openly about the company’s performance, for instance they openly discussed earnings per share saw a decline of 34% due to “a fiscal year 2017 comparison period that includes a substantial earnings gain from the beauty brands divestiture and on-time non=core charges related to the U.S. Tax Act” (30). They also discussed a “50 basis point decline due to reduced pricing. Furthermore, the following points of decline below were addressed the annual report as well:

• a 90 basis-point negative impact due to higher commodity costs,

• a 50 basis-point decline due to reduced pricing,

• a 100 basis-point decline from unfavorable product mix (within segments due to the disproportionate growth of lower margin product forms, large sizes and club channels and between segments caused by the disproportionate volume growth in Fabric & Home Care, which has lower than company-average gross margins),

• a 30 basis-point negative impact from higher restructuring charges and

• a 30 basis-point negative impact from unfavorable foreign exchange.

8. Economic Assessment of The US industries

Looking at the products offered by Procter and Gamble, you can see that they offer a myriad of different products consumers would run into at the grocery store. From paper towels to shampoo, Procter and Gamble has successfully acquired many consumer goods resulting in many of these ending up inside a single household. Arguably, Procter and Gamble operates as an oligopoly.

Competition to Procter and Gamble is generally limited and there are high barriers to entry for other companies looking to operate on the scale that Procter and Gamble operates on. As discussed earlier, both Johnson and Johnson and Clorox operate similarly to Procter and Gamble in that they too have different consumer goods under their own brand name that fall into their umbrella of products.

9. Product Assessment

Procter & Gamble has five reportable segments:

1.         Beauty

2.         Grooming

3.         Health Care

4.         Fabric & Home Care

5.         Baby Feminine & Family Care

Their Beauty segment accounts for 19% of net sales and 23% of net earnings. These product categories range from hair care to skin and personal care. These products include shampoo and conditioner, styling aids, treatments. Skin and personal care products include antiperspirant and deodorant, personal cleansing, and skin care. The great thing about Procter & Gamble is that their brands are household names. For instance in this segment some brands include: Head & Shoulders, Pantene, Olay, and Old Spice.Their Grooming segment accounts for 10% of net sales and 14% of net earnings. These products include shave care such as blades & razors along with pre and post shave products. These brands include Fusion, Gillette, Mach3, and Venus to name a few. Their health care segment accounts for 12% of net sales and 13% of net earnings. The product categories range from oral care to personal health care. This includes toothbrushes, toothpaste, vitamins/minerals/supplements. These brands include Crest, Oral-B, Metamucil, Prilosec, Vicks. Their Fabric & Home care segment accounts for 32% of net sales and 27% of net earnings. These product categories include Fabric care and home care. This includes fabric enhancers, laundry additives, laundry detergents, air care, and dish care. These brands include Ariel, Downy, Gain, Tide, Cascade, Dawn, Febreze, Mr. Clean, and Swiffer. Their Baby, Feminine & Family Care segment accounts for 27% of net sales and 23% of net earnings. These product categories include baby care, feminine care, and family care. This includes baby wipes, diapers and pants, feminine care, paper towels, tissues, and toilet paper. Some of the brands include, Luvs, pampers always, Tampax Bounty, Charmin, Puffs. (31) What I found both surprising and not surprising, is how none of their brands seem foreign to me or by extension to consumers. All of these products can be found in most stores, most households, and seen in many commercials. This goes to show how management and marketing has done a great job of developing brand recognition in multiple business segments.

Value Line report

https://research-valueline-com.leo.lib.unomaha.edu/secure/api/report?documentID=2185-VL_20180921_VLIS_PG_2211_01-315NE4IO1D0PORMEFFTG7N55J3&symbol=PG

References of The US industries

(1) https://piie.com/commentary/speeches-papers/united-states-world-economy

(2) https://www.imf.org/external/pubs/ft/fandd/1998/06/pdf/tavlas.pdf

(3) https://www.focus-economics.com/countries/united-states

(4) https://www.internations.org/china-expats/guide/29457-economy-finance/china-s-economy-an-

overview-17867

(5) https://www.indexmundi.com/japan/economy_overview.html

(6) https://www.nordeatrade.com/en/explore-new-market/germany/economical-context

(7) https://www.eubusiness.com/europe/uk

(8) https://www.federalreserve.gov/monetarypolicy/files/BeigeBook_20180912.pdf

(9) https://research-valueline-com.leo.lib.unomaha.edu/secure/api/report?documentID=2185-VL_

20181012_SelectionOpinion_01-2K882I5KEDM44Q39K6RF5RA2M4&symbol=-na

(10) https://www.conference-board.org/pdf_free/press/US%20LEI%20-%20Tech%20Notes%20Sep%

202018.pdf

(11) https://fred.stlouisfed.org/series/AWHMAN

(12) https://www.dol.gov/ui/data.pdf

(13) https://fred.stlouisfed.org/series/NEWORDER

(14) https://fred.stlouisfed.org/series/DGORDER

(15) https://fred.stlouisfed.org/series/HOUST

(16) https://www.forbes.com/sites/francescoppola/2018/07/19/the-flattening-treasury-yield-curve-

indicates-trouble-ahead/#3a78167a1660

(17) https://www.conference-board.org/data/consumerconfidence.cfm

(18) https://fred.stlouisfed.org/series/PAYEMS

(19) https://fred.stlouisfed.org/series/DPI

(20) https://fred.stlouisfed.org/series/PCE

(21) https://fred.stlouisfed.org/series/CMRMTSPL

(22) https://www.marketwatch.com/story/the-stock-markets-low-trading-volume-could-be-a-warning-

Analyst-says-2018-10-02

(23) https://www.investopedia.com/financial-edge/0512/low-vs.-high-risk-investments-for-beginners.aspx

(24) Bürgermeister, S. (2003) Book “Market Analysis”

(25) Cutler, P. (2008) Book “Principles of Marketing”

(26) Saxena, R. (2009) Book “Marketing Management 4E”

(27) http://www.mergentonline.com.leo.lib.unomaha.edu/companyfinancials.php?pagetype=asreported&compnumber=4593&period=Annuals&dataarea=BS&range=5&currency=AsRep&scale=AsRep&Submit=Refresh

 (28) https://www.wsj.com/articles/p-g-posts-strongest-sales-growth-in-five-years-1539950798

(29) https://www.nasdaq.com/symbol/pg/financials?query=income-statement

(30) http://www.pginvestor.com/Cache/1001242072.PDF?O=PDF&T=&Y=&D=&FID=1001242072&iid=4004124

(31) http://www.pginvestor.com/PG-at-a-Glance/Index?KeyGenPage=107374835