Why the current GDP growth is bad

US economy (measured by real GDP) grew by 0.6% in the Q1 of 2008. With all the dire predictions about slowing economy and recessions, the growth officially indicates that the economy is not in recession. (NBER defines recession as two successive quarters of negative growth).

But the current growth is not good news if you look at the components. My favorite book on Macroeconomics by Mankiw defines national income as
Y = C + I + G + NX
C is consumption
I is private investment
G is Government spending and investment
NX is Net exports

The U.S. Department of commerce report for Q1 2008 gives us the components of the 0.6% growth

Consumption grew 0.68%, Investments grew by -0.7%, Governmental component grew by 0.39% and Net exports grew by 0.22. On the surface it may look like a growth dominated by consumer spending but if you drill down the private Investment growth number, Inventories, an important component of private investments grew by 0.81%. This means manufacturers are storing more of what they produced in the shelves as the consumer demand weakened.

When excess supply over demand goes into inventory, manufacturers are bound to cut production and hiring. This means higher unemployment rate will follow that will lead to reduction in consumer spending and cause the national income to fall.

A growth caused by unexpected build up of inventory is not a good growth. If we take away private inventory growth component, the economy shrank by 0.4%. As the manufacturers readjust to cut production and reduce the inventory, brace yourself for a negative growth and unemployment.

It's a Text Book case of Market forces

Text books are expensive. I paid about $120 on the average for my new text books and did not have good experience buying used books online. The New York Times wrote an editorial on the high price of college textbooks calling it "outrageous pricing". I do appreciate the Congressional bill that will allow unbundled pricing. But more than this I do not see a need for any actions for setting prices.

Greg Mankiw, the author of my favorite Macroeconomics book that not only helped me do extremely well last semester but also gave me tools to analyze McCain's gas tax vacation, says in his blog that the Times should consider entering the market instead of editorializing sine there are no barriers to entry, t has a strong brand and it already knows how to hire writers. He concludes that Times, "would not view starting a new textbook publisher as an exceptionally profitable business opportunity"

I looked at the Market Research 2007 data on Text book publishing.
Size of new text book business: $3.4 billion, growing ~3%, slower than used book segment
Market share of top 8 players: 95%
Operating margin of top 4 players: 25.6%, 20.2%, 15.7%, 13.0% (a nice margin)
Demographic characteristic: Students buying fewer books as they share or buy more used books.

I think with such strong concentration at the top and high fragmentation at the remaining 5% it is not easy to enter the market. While the students buy the books, marketing is done to the professors who recommend the books. I wonder whether the professors rely on the established brand name publisher than the author of the books. This creates barriers for new entrants despite the latter's established brand name in other areas.

I also think margins like 15% to 25% are extremely attractive and also tells us that the publishers are not doing this just as a service to education. The continued increase in prices despite the technology, marketing strength, outsourcing and experience curve benefits is surprising. It does leads one to wonder if there is tacit price collusion. More analysis is needed to look at specific segments each of the top players specialize in and whether they split the market among themselves to avoid competing with one another.

I would like to see no more recommended textbooks and unbundling at chapter level. Professors should pick and choose separate chapters from a variety of authors (dealing directly with them instead of publishers) and suggest a proposed electronically published course pack. This sure would solve the high price of textbooks by changing the game instead of through legislations.