Wed, 7 Nov 2012
The U.S. economy has surged ahead of other major markets since 2009, but investors can't ignore the potential risk factors of a collapse elsewhere, says Morningstar's Bob Johnson.
Jason Stipp: I am Jason Stipp for Morningstar. While the U.S. has managed a slow but steady growth rate through our recovery from the 2008 recession, the rest of the world has been moderating or shown downright weakness in their economies. How long might this decoupling persist and what's behind it? We're checking in today with Morningstar's Bob Johnson, our director of economic analysis.
Thanks for being here. Bob.
Bob Johnson: Great to be here.
Stipp: The first question, what's some of the evidence that you've collected and that caused you to really feel like we are seeing a decoupling in the U.S. versus some of the other economies in the world? What are some of the facts behind that?
Johnson: Sure. I think one of the key things to look at, even as very recently, we've kind of gone from a 1.3% GDP growth rate to something that looks much more like 2% here in the U.S. So, we're kind of picking up in terms of our growth percentage. And if you look at it even on a year-over-year basis, we've been really, really very steady at kind of 2% level.
Meanwhile, Europe has gone the other way, and I'd say they are probably in a recession. We are going to have a quarter here where everybody over there is negative. So, they'll actually be having shrinking economies over there at the same time the U.S. economy is not only growing, but growing faster than before.
Stipp: In Asia, we know that they're still having much stronger growth rates than we're seeing in the U.S., but the trend isn't a positive trend like we're seeing here?
Johnson: Yeah. There we might have been growing 10% a few years ago, then it was 8%, now it's 7%, and I bet by the time we get done with all of this, it will be 5%. And Brazil and some of the South American countries are kind of the same kind of slowing thing while we certainly appear to be moving ahead.
Stipp: So there has been a broad theme for a while of globalization, that we're living in a global economy, that we are more connected now than ever before. So what are some of the reasons then in this particular environment that we are able to move ahead at a slow but steady pace while some of the other parts of the world are struggling?
Johnson: We're a little bit less export-dependent than most of other countries. I mean it has gone up; it's kind of gone from even 20 years ago, 9%, 10% to something looks like 13% 14% today. So, exports are a bigger part of our economy, but lo and behold, most of those turn out to be to Canada or to Mexico. Our exports to Europe are small. It's about 3% of GDP, in China even less at 1% of GDP.
So, it is a much more export-oriented world, but we're nowhere like where Germany is, where the numbers are in the mid-30s in terms of exports and probably similar number for China--their number gets little dicier because of the raw materials they import and then re-export. But most countries run a much higher percentage of exports than we do. We'd like to do more probably, but right now, it is what is at 13%, 14%.
Stipp: You also mentioned that the financials sector specifically, we obviously went through a financial crisis, but the fact that we've come through that now and made some changes to how things are running has put us in a bit of a better footing than perhaps what we're seeing in Europe where they are still dealing with the banking crisis in some ways?
Johnson: That's right. I think when we went through are recession, one of the best things that really happened in the U.S. was that when [Federal Reserve chairman Ben] Bernanke and others went through and forced the stress tests on the banks and ones that didn't make it were forced to recapitalize, to sell stock to the Treasury or to the public or somehow raise money to capitalize their banks. And in Europe, for example, they never really did that. So now they are facing the problems now and that's part of what's behind their recession. We already kind of have been through that.
Stipp: Since we're talking about sectors, energy is another one that you think could be behind some of the decoupling that we're seeing, specifically domestic energy production. We know that that's a growth story, and we've seen that be a growth story recently. How is that working in the global dynamic?
Johnson: Absolutely. We have grown our energy production at about 20% since 2008, so we've really kind of stepped it up if you will, and it's actually been responsible for some of the improvement in employment, and I think there are more carry-on effects. Now people see that this [recovery] is kind of extended and is for real. Maybe more chemical companies, more energy-related things happened here. So there are even some long-term knock-on effects from having a stronger energy industry here. And then on top of it, it brings down our trade deficit which helps GDP, and in general, it gives us a stronger dollar which is a good thing. So, a lot of positives have come out of our oil industry. And it's a big deal, and I don't think people kind of realize what a big deal it is.
Stipp: Another bright spot for the domestic economy is housing. How much is housing going to help us in relation to what the rest of the world is seeing?
Johnson: One thing that we can do, I guess it's probably hard for me to posit that we're get all the way back [to prerecession numbers], but we got down to--1.5% of our economy was housing-related. It probably got somewhere up over 7% at the boom. I don't know if I really want us back at 7.5% again, maybe that would be too high. But now we are kind of in the 2s. We certainly could probably double that to 5% and still make some sense. And because we have more arable land here and because it's a little bit easier to build here than some other parts of the world, we just have a little bit more space, that's something we have access to, whereas a lot of other countries are like, "Well there is no arable land, and we can't get water to it. We can't get the sewage disposal for it."
Here, we still have that room in many markets, maybe not so much in the Northeast. But we have many markets where there is room for growth. So that's something that's not open. So, if we were to get all the way back, we went from 1.5% to 7.5%, I mean, that's 6%. And if you did that over three years, that's a 2% fill-up to GDP. I don't think that's going to happen, but just to give you some idea of how the mathematics work, it could be pretty powerful.
Stipp: Another potential bright spot is a specific one in Boeing, and you've talked about Boeing before. How does Boeing fit into this? If they are making aircraft potentially to export them and the rest the world this weak, will Boeing really give us a boost here domestically?
Johnson: Yeah, I mean, they do some of their work overseas, but an awful lot of it is also over here. And a lot it is in the new 787 line with the new lightweight fiber technology that gives the planes the fuel efficiency. I mean, they have 10-year backlog in those planes and they're making a relative handful of them, maybe even only a couple a month and they are at some point going to get the 10 a month. And that's just huge for our manufacturing sector.
And those are good wage jobs, and it supports another set of subindustries beneath it. And I think we are just kind of at the front end of that. And the good news is, like I said, their order book is 10 years long because of all the fuel savings that [the 787 models] have. The biggest worry now is they can't produce them fast enough and keep the customers happy enough, but as fuel prices continue to be relatively high, the demand for these planes is strong.
Stipp: So, certainly we have a handful of bright spots for the U.S. economy and what may keep us in a growth mode while some of the other countries of the world are moderating or suffering, but what about some risk factors to this? So, these are good positives, but we also have some other effects that we are seeing in the U.S. The first one that we've talked about before is we are also seeing a decoupling of U.S. corporations from the U.S. economy, and that could be a negative for us and potentially for the economy, right?
Johnson: Absolutely. So many goods are produced overseas and sold overseas, so that some of the benefits that some of the multinationals have seen and some of the really good earnings growth they have seen over the last three or four years, haven't translated into the U.S. employment growth because they're both making, shipping and delivering things all outside the United States. But here's where the rub comes. My decoupling thesis was all based on, all right things can't get too bad because those companies are obviously based in the U.S., have a headquarters facility here if nothing else. And if things get too bad, those companies will start cutting back at their U.S. staff, so it affects on the employment side, probably not too drastically. Large corporations are tremendously efficient, so they don't have a lot of excess people lying around. And then also as those earnings come in bad at some of those larger multinationals or maybe two thirds of the revenues come from overseas, maybe their stock prices start to come in a little bit, and then you get kind of the reverse of what we'd had for the last three years, which is the wealth effect where we've come back and reversed on that.
Stipp: What factors would you be looking at to see that this decoupling is persisting? How would you gauge whether things are getting really bad? At what point do you see Europe really becoming an issue that starts to threaten that decoupling that we've been seeing in the U.S. and enjoying at least for a while?
Johnson: If Europe is a little week and China slows some, I can live, and I feel pretty good about that. But if Europe were to go into a free-fall where we are talking like 10% GDP declines, well that's going to suck China down, which may even suck Canada and Australia down, and then it starts to really snowball and affect to U.S. So this kind of works in a range of what a normal recession is, but if this turns out to be the Big Kahuna, like a repeat of 2008, and we have this huge decline, then all bets are kind of off. I think then we'll all recoupled again.
Stipp: Well, some interesting trends. We certainly hope that we don't see that kind of severe recession in Europe, but some interesting decoupling trends that you've seen and hopefully, we'll see those bright spots in the U.S. continue to work in our favor, at least, in the intermediate term. Thanks for joining me, Bob.
Johnson: Thank you.
Stipp: For Morningstar, I am Jason Stipp. Thanks for watching.