The Amazon Effect On The U.S. Economy

Amazon.com Inc. (AMZN) is everywhere. By disrupting the way people shop, Amazon has created economic ripple effects that go far beyond the customer’s wallet to directly and indirectly impact economic activity, whether that impact is inflation, jobs or investment.

The Wallet Opener

Amazon started with books and then added pretty much everything you can think of, from engagement rings to coffins, for sale on their site. Add the convenience of having it delivered promptly to your doorstep, and customers have rewarded Amazon with open wallets, so much so that North American electronics and general merchandise sales for the company have grown from a mere 2% of total general merchandise retail sales (GAFO) in 2006 to more than 60% in 2016. Similarly over the past 10 years, this category of Amazon sales has increased from a little over 7% of e-commerce retail sales to more than 66%. And the growth is accelerating. Last year alone, this segment saw a 28% jump in sales compared to 2015.

If you consider a more macro picture, consumers spending more is a good sign because it contributes to the GDP. Having said that, in no way is consumer spending on Amazon significant enough yet to tip the GDP scale. But it could be in future.

The Inflation Killer

Amazon has disrupted traditional retail and accelerated the demise of struggling players. Without storefronts the company’s overhead costs are significantly lower than other retailers giving them an edge to undercut on prices and operate on wafer thin profit margins.

That makes some economy watchers nervous about Amazon’s deflationary impact. Ideally, low unemployment is accompanied by wage growth, which in turn fuels inflation as companies pass on the cost to consumers. This is the logic of the Phillip’s Curve, but Amazon has disrupted that as well.

Higher competition and lower prices limit the companies’ ability to pass on any wage increases to consumers. Those worries were recently echoed in the wake of the Whole Foods acquisition where remarks by Chicago Federal Reserve President Charles Evans were construed in that context.

“We know that technology is disruptive. It’s changing a number of business models that used to be very successful, and you have to wonder if certain economic actors can continue to maintain their price margins, or if they are under threat from additional competition,” Evans said according to Bloomberg. “And that could be an undercurrent for holding back inflation.”

The Employer

In its latest annual report Amazon lists its total number of employees at 341,400. This includes both full-time and part-time employees. For a company this size that number is low but expected because Amazon does not have a significant storefront presence like Wal-Mart Stores Inc. (WMT) which employs 2.3 million people worldwide.

Amazon also engages third party contractors/companies for tasks like deliveries. Those people go door to door dropping off Amazon packages but are not employees for the company. Does that matter? Yes and no.

In a way, these are jobs that are that people are doing, therefore, some credit could go to Amazon for job creation. On the other hand hiring contractual workers helps the company keep its costs in check. Amazon has in the past been sued by contingent workers claiming they received less than minimum wage, meanwhile there were others that criticized the company for harsh working conditions.

Another angle of the jobs conversation is how many jobs Amazon is eliminating. Considering the company is hurting other retailers, forcing them to shutter stores and cut back on costs, any job gains at Amazon may not in fact mean anything. Though the actual extent of job loss is hard to determine according to research by the Institute of Local Self-Reliance (ILSR), in 2015 Amazon’s impact on jobs in the U.S. was a net loss estimated at 148,774 jobs. Another estimate by American Booksellers Association (ABA) and Civic Economics pegged net job loss at 222,000 for 2015. This gap could increase further with automation.

Amazon’s quest for innovation and technology to achieve operational efficiency has people worried about elimination of jobs. Those worries are not far-fetched considering that the company is testing its Amazon Go store in Seattle.

The Facilitator

Amazon’s logistics infrastructure doesn’t just help it ship to consumers all across the globe, it also aids another group of people: small businesses. Listing their products on Amazon helps them increase their customer reach and the delivery essentially becomes Amazon’s headache.

“More than 100,000 entrepreneurs achieved over $100,000 in sales selling on Amazon in 2016,” the company said in a press release earlier this year.

As small businesses thrive, it will lead to further job creation and spending. Amazon says that 600,000 jobs were created outside of the company as a result of the Amazon Marketplace for small businesses and entrepreneurs.

The Tax Payer

Income Tax: Does Amazon pay tax? Yes. Is it a lot? No. Principally, President Trump’s claim about Amazon not paying any tax is wrong, however, a 2016 analysis by the New York Times and S&P Global Market Intelligence reveals that from 2007 to 2015, Amazon paid taxes at an average rate of 13%, nearly half of the 26.9% average for the S&P 500 companies. But it wasn’t alone. Other tech giants like Facebook, Alphabet and Apple also had an average tax rate significantly lower than the average.

Sales Tax: Not having a physical presence or employees in certain states also saved Amazon sales tax. Sales tax is a complicated subject with rates and rules varying across states. The most simple explanation in this context is that tax laws in many states need the physical presence of an online retailer in the state in order to collect sales tax. Therefore by not having its own warehouses or employees in certain states, Amazon saved on tax.

This however, wasn’t a problem specific to Amazon as this applied to any online retailer shipping goods across stateliness. The National Conference of State Legislatures in its most recent estimate pegs the 2015 tax revenue loss due to this peculiarity at $25 billion. Amazon acknowledged this issue in its annual reports, and over a period of time it started collecting sales tax on all goods that were sold in or delivered to states that have such a tax. Five states: Alaska, Delaware, Oregon, New Hampshire and Montana do not impose a sales tax.

The sales tax issue gets even more complicated when it pertains to third party sellers.

The Investment

Amazon is in the race to become the first trillion dollar company by market cap. This year it hit many milestones including crossing the $1,000 mark for its share price. A recent jump in shares briefly crowned CEO Jeff Bezos, who owns 17% in the company, as the richest man in the world.

The run for Amazon shares has been phenomenal for many years. The company made its stock market debut 20 years ago and $100 invested then would have turned close to a spectacular $63,000. (See also: If You Had Invested Right After Amazon's IPO.)

In the past 10 years, the stock has given a whopping 1180% return, as of August 17, 2017, while the 5 year return was nearly 300%. The S&P 500 meanwhile returned only 68% over the 10 year period. Imagine the wealth that was created by Amazon's stock return and the potential economic activities it could finance in the future. 

The Investor

Amazon isn’t just a bumper investment for those who go in at the right time, it is a big investor itself. As of 2016 year-end, the company held a portfolio of $19.6 billion in cash equivalents and marketable debt securities. It also had $467 million worth of equity investments or equity warrants in public and private companies.

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