The second component of the environmental scan, the economy , pertains to the income, expenditures, and resources that affect the cost of running a business and household. We’ll consider two aspects of these economic forces: a macroeconomic view of the marketplace and a microeconomic perspective of consumer income.
LO 3-3Discuss how economic forces such as macroeconomic conditions and consumer income affect marketing.
Of particular concern at the macroeconomic level is the performance of the economy based on indicators such as GDP (gross domestic product), unemployment, and price changes (inflation or deflation). In an inflationary economy, the cost to produce and buy products and services escalates as prices increase. From a marketing standpoint, if prices rise faster than consumer incomes, the number of items consumers can buy decreases. This relationship is evident in the cost of a college education. The College Board reports that since 2000 college tuition and fees have increased 146 percent (from $3,508 to $8,655) while family incomes have increased less than 19 percent. The share of family income required to pay for tuition at public four-year colleges has risen from 8 percent in 2000 to 17 percent today.23
Periods of declining economic activity are referred to as recessions. During recessions, businesses decrease production, unemployment rises, and many consumers have less money to spend. The U.S. economy experienced recessions from 1973–75, 1981–82, 1990–91, and in 2001. Most recently, a recessionary period began in 2007 and ended in 2009, becoming the longest in recent history.24
Consumer expectations about the economy are an important element of environmental scanning. Consumer spending, which accounts for two-thirds of U.S. economic activity, is affected by expectations of the future. The two most popular surveys of consumer expectations are the Consumer Confidence Index, conducted by a nonprofit business research organization called the Conference Board, and the Index of Consumer Sentiment, conducted by the Survey Research Center at the University of Michigan. The surveys track the responses of consumers to specific questions about their expectations, and the results are reported once each month. For example, the Index of Consumer Sentiment asks, “Looking ahead, do you think that a year from now you will be better off financially, worse off, or just about the same as now?” The answers to the questions are used to construct an index. The higher the index, the more favorable are consumer expectations. Figure 3–4 shows the fluctuation in the Index of Consumer Sentiment and its close relationship to economic conditions (green areas represent recessionary periods). The consumer expectations surveys are closely monitored by many companies, particularly manufacturers and retailers of cars, furniture, and major appliances.