Corporate Economic Conditions Report 17 April 2013
SECTION 1: EXECUTIVE SUMMARY
Economic Conditions Overview:
Overall economic conditions are expected to improve over the next two quarters. As part of the monetary policy (quantitative easing part 3), Federal Reserve continues to buy bonds to influence low interest rates in order to increase investments. A decrease in unemployment and an increase in private consumption will drive the economic growth for the next two years.
Expected direction of change in economic aggregates:
The drivers for the major changes in the economy will be steady growth in GDP and the decrease in unemployment. Additionally inflation rates are forecasted to remain unchanged and interest rates will remain at an all-time low.
Expected changes in economic factors differently than the general economy:
PepsiCo operates similarly as many other Fortune 500 companies. As such, the general economic aggregates such as GDP, interest rates, inflation rates and unemployment rates will impact PepsiCo similarly as they would impact other companies.
In an effort to gain tax revenues, there is government movement to increase taxation on high sodium or high sugar snack foods and beverages. States such as New York have passed laws that ban supersized sugar filled beverages at restaurants, concession stands, and other eateries. This taxation on soda may impact PepsiCo’s revenues differently than it would affect other industries in the general economy.
Expected Changes to Company Performance in the next 2 years:
The economic conditions have finally taken a turn after 5 of years of downward sloping. A turnaround in GDP and a decrease in unemployment rates are generally viewed as a driver for increased revenues.
However, a multivariate regression analysis of the macroeconomic variables effect on PepsiCo’s US revenues using GDP growth, interest rates and unemployment rates as input variables did not have the same projections. The confidence level of the regression model is approximately 85%. This regression analysis projected PepsiCo US revenues to decrease by 10 % and 12 % in year 2013 and 2014, respectively, compared to 2012.
SECTION 2: GENERAL ECONOMIC CONDITIONS
GROSS DOMESTIC PRODUCT
Overall, the growth of United States’ real Gross Domestic Product (GDP) is expected to be the same as year 2012, at the rate of 2.1% for the year 2013. A February 2013 survey of 52 institutions by Wall Street Journal indicated that GDP is expected to rise 2% in Q1 and 2.2% in Q2, an average of 2.1 % over the next two quarters. Furthermore, the same survey in January 2013 indicated the average of 1.95% GDP growth over the next two quarters. The estimate increase in February 2013 signifies optimism in the economic conditions. The survey also indicated that there is 59% upside risk to the 2013 growth forecast.
Components of GDP such as Private consumption, Gross fixed investments are expected to increase and then level off whereas Government consumption, imports and exports are expected to increase. Nominal GDP and GDP per Capita are expected to increase in year 2013. Figure 1 and Table 1 below lists the metrics of the GDP on a quarterly basis for 2013 and historical comparisons and future forecast respectively.
Figure 1: GDP Growth by Quarters – 2013 Source: Economic Intellegence Unit Report
Table 1: GDP Growth Historical Comparisons and Future Forecast Year
Nominal GDP (US$ bn)
| Real GDP growth (%)
| Expenditure on GDP (% real change)
| Government consumption
| Gross fixed investment
References: Accessed February 2013. < http://www.usatoday.com/story/money/business/2012/12/12/fed-buys-treasuries/1762459/>
Drenkard, S (2011)
“Economic Forecasting Survey: February, 2013. The Wall Street Journal. Dow Jones and Company, Inc. Accessed February 2013.
“NYC Board of Health Passes Big-Soda Crackdown Rule.” Associated Press, September 13, 2012. Web.
PepsiCo Annual Reports. PepsiCo. 2012. Web. Accessed February-April 2013.
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