Fruits, Suits, and Juice

Mr. Helmsing

AP Economics

A Block

18 November 2011

Katarina Hickey

Katarina Hickey Mr. Helmsing

AP Economics 18 November 2011

Frequent stories reported on the current evening news are the struggling lives of the unemployed, the

foreclosure of even more homes, the increasing threat of the astronomical national debt, and the public opinion

of the U.S. economy. Most U.S. citizens would probably agree that the economy is steadily worsening. Some

statistics, however, contradict this common opinion. Increasing GDP, increasing average hourly wage, and

decreasing unemployment rate all indicate that the U.S. economy is actually recovering from the recession.

The United States has a goal of 4% GDP growth per year. At this rate of growth, unemployment would

be significantly reduced, the debt would be cut drastically, and the American people would have more

opportunities to prosper. For the 2nd quarter of 2011, the GDP had an increase of 1.3%. The GDP grew by

2.5%, however, for the third quarter of 2011. The percent increase nearly doubled for the third quarter. An

increase in GDP means a growth in overall productivity. If the rate of growth has increased, the economy itself

is growing as well. If the status of the U.S. economy is growing, then it must be climbing its way out of the

recession.

Average hourly wages are a good indicator of the U.S. economy. If wages are increasing, this means

that employers can afford to pay their employees more. Assuming that employers have the money to increase

wages, their total revenue must be increasing. When total revenue is increasing, producers are most likely

selling a larger quantity of products. This also means that since revenue has grown, consumers must be in the

market to buy more, therefore, they have extra money to spend. In August, the average monthly wage was

$23.08 per hour. The following month, it rose six cents and then five more cents in October to a new average of

$23.19. If people’s wages are higher, they are more likely to have money left over after they purchase

necessities. This surplus can be pumped back into the economy further stimulating it. The steady increase of

average hourly wage is an indicator that the U.S. economy is in a recovery stage.

When an economy is facing particularly difficult times, the unemployment rate naturally begins to rise.

If a very small percentage of the population is unemployed (about 1% unemployment rate), the economy can

actually benefit. There would be more of an incentive for the employed to work harder and for a lower wage to

protect their job. The U.S., however, is far from this “perfect point.” For July, August, and September, the

unemployment rate was 9.1%. In October, it made the first decrease in quite a few months. It dropped a tenth

of a percent to 9.0%. Although this decrease is extremely small, it is still significant. It hints at a slight

improvement in the U.S. economy.

These three factors indicate that the United States is headed in the right direction despite the public

opinion that the U.S. is actually still in a recession. An increase in GDP confirms a growth in productivity

which suggests an improvement in the economy. If hourly wages are increasing, both employers and

employees, logically, must have more money. Finally, even a minor decrease in the unemployment rate can

serve as proof that the status of the economy is improving. With these statistics, it is evident that the U.S.

economy is now in a recovery stage.

IBM was the first stock that I chose. A forty-nine year IBM stockholder advised me to invest in it

because it is well established and has been consistently increasing over the past couple of years. Although the

economy isn’t currently at its prime, most firms still rely on an operating system to run their business. A large

percentage of corporations operate using IBM (now called Lenovo) desktops or laptops. Despite the economy, I

expected this stock to continue to increase, so I invested in it.

Computing Tabulating Recording Corporation (CTR) was formed in 1911. Based in New York City,

the company was composed of 1300 employees and manufactured various types of machinery including meat

and cheese slicers. CTR was renamed International Business Machines Corporation (IBM) in 1924 because this

name better represented their long-term goal. The Great Depression presented IBM with a huge financial

struggle, but President Watson tackled this economic crisis in an unorthodox manner. Instead of laying people

off, he hired more. Not only did he hire more employees, he increased the benefits of his entire work force.

Additional training was offered to all employees and research increased significantly. This was a risky tactic,

but it certainly paid off. The Social Security Act of 1935 was the spark that started the fire for IBM. This was a

huge governmental accounting operation, and IBM was the only company that could offer the necessary

equipment. After this deal was contracted, IBM began to expand around the globe. IBM has been granted

several awards for its efforts to improve international relations through business ties. In 2005, the PC division of

IBM was sold to a Chinese company, Lenovo. Currently, IBM has more US patents than any other company. It

continues to be a successful business that manufactures goods that are necessary for a large numbers of firms.

IBM’s revenue comes from two different areas: products and services. Computer hardware and

software are the primary products that IBM still sells. About 23% of their revenue comes from software retail.

The company also reports revenue received from their services: financing, servicing, and renting. Over 57% of

IBM’s revenue comes from Global Management. They offer management services on a contract basis. In

2010, IBM’s total revenue was 99,870,000,000. This has increased nearly 5 billion dollars from 2009. It is,

however, still a couple billion dollars under the 2008 value of 103,630,000,000. The total revenue for IBM has

not significantly fluctuated over the past three years. Despite the declining economy, IBM’s services are still

needed, so the value of its total revenue has only been minimally affected.

The current assets for IBM are valued at 113,452,000,000. Over the past three years, the worth of total

assets has remained fairly constant. The total stockholder’s equity, however, has steadily increased over the

past three years. This confirms that IBM continues to be successful, as well as a good investment. It has risen

nearly 10 billion dollars since 2008. It is now valued at 103,630,000,000. The total value of liabilities is

90,405,000,000 for 2010; it has changed very little over the past three years.

IBM and the Dow Jones have extremely similar peaks and troughs. On September 22, IBM reached its

lowest value per share for our 9-week tracking period at 168.62. On this date, the Dow hit its second lowest

point for this 9-week period. Eerily similar, the Dow average and IBM stock both have a double peak between

September 26th and October 1st. On October 4th, both DJIA and IBM began to increase. Dow Jones reached its

peak on October 28th; IBM hit its second highest point on this date. Represented by this graph, DJIA and IBM

were both volatile over this 9-week period.

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170

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195

9,500.00

10,000.00

10,500.00

11,000.00

11,500.00

12,000.00

12,500.00

IBM DJIA

Dates

DJIA v IBM

DIJA

IBM

Like IBM, Southern Company (SO) is a well- established stock. Electricity is a fairly inelastic good.

Regardless of the economy, people will still find a way to pay for electricity to heat and cool their homes. I did

not expect SO to drastically decrease in value since it is a necessity, and there are no substitutes. I thought this

would be a safe company to invest in.

Beginning in the 1920s, Southern Company (SO) supplied electricity for Alabama, Georgia, and

Mississippi. It was composed of Alabama Power, Georgia Power, Gulf Power, and Mississippi Power. In the

thirties, it combined with some northern companies. As the company became more established, it expanded to

other states, including Delaware, and even other nations, becoming a global energy company. SO has grown so

much that it now serves ten countries on four different continents. In the late nineties, SO began to provide

digital wireless services through Southern LINC. Southern Telecom became a subsidiary of SO and offer

colocation and dark fiber optic lines to network businesses. Southern Company eventually received

certification to enter the retail gas market. After just a few years, it was sold and renamed Gas South.

Southern Company’s primary source of revenue is supplying a large portion of the South with electricity

in their homes and businesses. The total revenue for 2010 and 2008 are almost equal. This proves that

regardless of the current economic conditions, the demand for electricity is highly inelastic. In 2010, the total

revenue was 17,456,000,000, and in 2008 it was 17,127,000,000.

Over the past three years, Southern Company’s total assets have increased nearly 7 billion dollars; the

total assets for 2010 were valued at 55,032,000,000. Remaining relatively constant over the past couple of

years, the total liabilities for SO were 37,748,000,000 in 2010. The total stockholder’s equity for 2010 was

16,909,000,000, approximately a 3 billion dollar increase from 2008.

For the most part, Southern Company’s performance looks somewhat like that of the Dow Jones average

over this 9-week period. Around the 5th and 6th of October, both reached their lowest point. On the first of

November, SO and DJIA fell dramatically. To end the 9-week period, both experienced a sharp increased

followed by a decrease. Although not as closely as IBM, Southern Company did, in fact, mimic the Dow for

these 9 weeks.

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41.5

42

42.5

43

43.5

44

44.5

9,750.00

10,250.00

10,750.00

11,250.00

11,750.00

12,250.00

SO DJIA

Dates

DJIA v SO

DIJA

SO

My last stock is Apple Inc. (AAPL) stock. It seems as if everyone owns at least one Apple product:

IPhone, IPad, IPod, IHome, etc. Since technology is constantly advancing, Apple is constantly releasing new

products. With the release of the iPhone 5, I thought that the stock may increase because of a positive consumer

opinion. Also, new cell phone carriers recently introduced iPhones to their selection of cell phones. I use at

least one Apple product every day, and I imagine a lot of people do, too. There were no obvious reasons that

AAPL would decrease. There were, however, several indications that it may increase, so I invested in it.

Apple Computer was formed in the spring of 1976 and was incorporated just a few months later. The

first personal computer sold was called the Apple I, and it sold for a price equivalent to over twenty-five

hundred 2011 dollars. The word “computer” was dropped from the title because the company intended to place

a greater emphasis on consumer electronics. In the 1980s, Apple began to compete against IBM a nd Microsoft.

Through this competition, Steve Jobs began to work on the Macintosh. Apple won the race, but the consumer

reaction was somewhat negative due to the high price tag and limited software titles. After the turn of the

century, Apple introduced the iMac followed by the iPod and iPhone. The first stores were opened shortly

after, and Apple established iTunes. This service quickly became a market leader. The prices of Apple stock

demonstrate the overall success of Apple. In a three year period, the stock increased from $6 (split-adjusted) to

$80. As new products were released, the stock continued to steadily increase. In October, the stock hit an all-

time high of over $424. The death of Steve Jobs, a founder of Apple, Inc., on October 5th marked the end of an

extremely successful era for Apple, Inc.

A portion of Apple’s revenue comes from their services, but the majority of it comes from hardware

sales. In 2008, Apple reported that over 42% of their revenue was received from iPod sales. For 2011, over

50% of the money that Apple makes is from iPhone sales. If you combined the revenue received from both

iPhones and iPads, it would equal about 70% of Apple’s total revenue. Over the past three years, Apple’s total

revenue has sky-rocketed. For 2009, the total revenue valued 42,905,000,000; now, it is valued at

108,249,000,000. This data directly reflects the success of Apple’s technological advances.

The total assets for Apple have been continually increasing for the past three years. Up from

47,501,000,000 in 2009, Apple’s total assets now equal 116,371,000,000. Total liabilities have more than

doubled in the past three years; they are now equal to 39,756,000,000. Due to Apple’s continued success, its

stockholder’s equity has continued to increase as well. For 2011, it equaled 76,615,000,000.

Unlike IBM and to a lesser degree Southern Company, Apple had very few similarities in trend. On

September 16th, while DJIA was dropping, AAPL was climbing to its second highest peak. Beginning on

October 10th, both began to increase again, but Apple soared much more dramatically. When AAPL reached its

highest value for the period, the DOW was nowhere near its highest peak. For the last two weeks of tracking,

they produced a more similar pattern. Overall, the two records had very little similarity, especially compared

IBM and SO.

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370

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430

9,500.00

10,000.00

10,500.00

11,000.00

11,500.00

12,000.00

12,500.00

APPL DJIA

Dates

DJIA v APPL

DIJA

AAPL