Sneak a biscuit treat out of the cookie jar
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Could the appetite suppressant Ozempic be bad for business? This question was posed by humorous financial writer Matt Levine. The pharmaceutical companies that sell these drugs and the food companies that lose out to them may have mixed feelings. An interesting theoretical problem is that these universal shareholders should call the CEOs of drug companies and say, “Stop selling these drugs.The profits from the drugs are not enough to offset the losses from the snack foods.'' You can also imagine saying, “. ”
This question can be analyzed in the same way that economists address the claim that Taylor Swift's record-breaking tour stimulated the economy.
Consumer spending has been studied for decades. Economics luminaries such as John Maynard Keynes, Milton Friedman, and Franco Modigliani have developed theoretical models and coupled them with data. Since the consumption function is a central part of most macroeconomic models, it has been investigated by many analysts. Here's what we know:
The determinants of total consumer spending include current income, expected future income, interest rates, assets, and several other factors. The allocation of total spending to specific categories, such as food and housing, is determined by consumer preferences and the prices of various items. Unusual events can cause temporary changes in total spending, but consumers quickly adapt.
Temporary changes include rising gasoline prices. Adjusting to the increased cost of filling a gas tank will take time, during which consumers may spend more money than usual, but it is temporary. As another example, the pandemic reduced total spending as some stores and restaurants closed. However, his spending only returned to his previous trend line in about a year.
With this model in mind, Ozempic may change the composition of total spending, but the total amount remains the same. If consumers snack less, they save money, but not for long. New clothing that fits a slimmer body is the first thing that comes to mind, but the list of consumer demands is quite long. Ultimately, every product competes with every other product.
In 2012, newspapers reported that some people were cutting back on restaurant meals to pay for their iPhones. We don't typically think of Cracker Barrel competing with Apple, but people who want to spend more on one product will likely spend less on another product or service. Conversely, if you spend less on one type of product, you will buy more of other products.
Returning to the topic of Taylor Swift's concert tour, many people probably spent more than usual on concert tickets and, in some cases, travel expenses. However, the data I check every month shows no increase in total consumer spending. Concert-goers left their seats elsewhere.
So while Ozempic is a threat to some snack food companies, it is not a threat to the economy as a whole. And well-diversified investors will benefit from the alternative spending choices of consumers.
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