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By Jason Stipp | 11-11-2010 05:32 PM

The Global Gears in the U.S. Economy

Morningstar's Bob Johnson highlights the global trade, demographic, and inflation drivers at work in his economic forecasts today.

Jason Stipp: I'm Jason Stipp for Morningstar. It's International Investing Week on Morningstar.com, and we're kicking things off by getting a lay of the land.

I'm joined today by Morningstar's Bob Johnson, director of economic analysis, and he's going to discuss some of the global factors that he looks at in his economic studies.

Thanks for joining me, Bob.

Bob Johnson: Great to be here.

Stipp: First question for you. You typically look at the U.S. economy, but in today's world it's almost impossible to think of the U.S. economy just in isolation. What are some of the major things – what's the first thing that comes to your mind as the global influence on how our domestic economy is going to do?

Johnson: Well, I think that certainly the trade issue is probably number one on the docket. I mean the good news is that trade is only 13% of our gross domestic product. So, it's a relatively smaller number than say a Germany or China, where the number may be more in the 30% range, but trade is still very important, and the dollars that we do in trades are still very, very significant.

Stipp: So I know that one of the things that you are hoping will help drive our recovery is the export situation. What's your take on how exports may play out in the future for us and where we might see the most benefit from exports?

Johnson: I'm still bullish on our exports. I think the dollar has certainly come in here. It's come down, which makes our goods more attractively priced abroad. In the spring, you'll recollect, that when the dollar was strong we had some pretty bad, that is big import numbers, and now as the dollar moves around, we're in a more favorable situation there. So, I think that puts us in a better position, having the weaker dollar.

Stipp: So, Bob, which areas of our export markets specifically might be able to benefit?

Johnson: I think we've got a couple of areas where we've seen some real strength, and we've got some real continuing ongoing competitive advantages. Our capital goods industries, the Caterpillars, the Deeres, the ITWs--a lot of the core manufacturing capital goods equipment are still needed overseas as the mining economies throughout China and Australia need more and more mining equipment. Those are certainly key industries, where I think we'll continue to do well on an export economy.

If Boeing, if they can never get their act together on their 787, is a huge number. Those things cost hundreds of millions and will certainly be a big factor in the economy. Even 737 airliners are an important overseas product shipment and really make a difference to our numbers.

Not a huge number, but agricultural products is another area. And again, we've had a number of crop failures this year, and as prices move up, I think we've got a real opportunity in agricultural products as well. So those were probably some of the key areas for economic and export improvement.

Stipp: On that front, there has certainly been some resistance to weakening of the dollar in the overseas community, and there has also been some concerns over a possible retaliation, or trade wars start to crop back up again. If we see a lot of infighting or fighting overseas about trying to protect their own interest in exports, how much might that affect the U.S. versus other countries?

Johnson: Well, everybody is kind of hoping, well, the exports are going to bail me out. I think you can't have everybody in the world doing exports at the same time as being their savior, and I think that's where we may run into a little bit of trouble.

Now, I hope we don't get into such a competitive trade war situation, where everybody is devaluating their currency and that putting up some type of artificial tariffs or local content rules that mess things up, because I think in general trade is a good thing and has really helped growth over the last 20 years. It may not look so wonderful in the last three years in jobs lost, but nevertheless, the trade has generally been a helpful thing for world growth.

Stipp: Somewhat related to trade is the austerity measures that we're seeing. A lot of the developed nations, Europe, for example, undertaking. Obviously, if they are going to be undertaking these measures they might be buying less or they might have lower imports from the U.S. Are you concerned about some of the austerity measures that we're seeing having a negative effect on our ability to export?

Johnson: I don't think so. I think a lot of the austerity measures that you're seeing are really in more developed economies. As we talked about last spring when we saw the European debt crisis, our exports to Europe are relatively small, 2% to 3% of our GDP. I mean, Canada and Mexico are actually bigger export partners than Europe is.

So, austerity measures there probably won't hurt us despite what Cisco may have said today that exports to foreign governments may have hurt them a little bit, but I've think that may be kind of a special case.

Stipp: We also got a preliminary report on some I guess you would call them austerity measures that might need to be taken in the U.S. that included some things on social security and on where we might have cutbacks in spending. If the U.S. does need to undertake, and lot of folks think that we need to undertake, some cutbacks and some measures of austerity, what kind of impact do you think that might have for our economic future?

Johnson: Well, I mean governments are a decent portion of our overall GDP. So, clearly if they cut back, it's not a good thing in terms of overall spending numbers. But on the other hand austerity and more careful spending means that more decision making and more money powers in the hands of individuals, which is a good thing and people spend the money where they want and we can adapt and so forth.

And also the fact the government has become more careful with their spending, whether it's here or aboard, gives people greater confidence to spend what they've got. People may be hesitant to spend their money today, because they say, well, I'm not really going to get social security. We all know that's a joke. But if they raise the age when you're collect it, it means test some of it and do some things to put some parameters around it, now maybe we've got a program we can trust again and that people say, "You know what, I can spend a little more because here is what I know I've got coming for sure."

Stipp: Speaking of social security, I think the aging of the baby boomers and some of the shifts in demographics we might see in the U.S., is something else that has been on your radar. Can you put the demographic situation in the U.S. in a more global perspective and some ideas on how that affects your economic analysis?

Johnson: In the short run, you can't do a lot of about it, but long-term demographics come into play and one of the things that the U.S. has always had working for it is that we have more population growth than almost any other developed nation, certainly, and even compare it to China in 20 years, we may be growing faster than they are, because we tend to have a higher birth rate, because we've got a stabler, more consumer-oriented economy, we are more open to immigrants than a lot of other countries are, and all those things tend to give us a little bit better growth than most countries have.

And especially when you get in a situation with an aging, a baby boom phenomena, if you will, in Europe, you're going to run in these some real problems with very few people supporting a very large aged population in the U.S. Yes, there is a gap, but it's not nearly as bad as it is in most countries. And even China starts to run into some problems in that demographic arena with the one child, one family rules that were implemented--that begins to cut a little bit in 20 years in their economy.

So, that's certainly something that goes on that's positive for the U.S., and obviously U.S. productivity still remains rock solid, and that's certainly one of the big helps to our economy. We got so much more labor flexibility than almost any other country. So, that gives us another long-term advantage. People often forget when they say, look at our deficit right today and it looks awful, but we've got these long-term secret weapons, if you will, of productivity and population growth. It's far better than many other countries.

Stipp: Last question for you, Bob. It hasn't been something that a lot of folks have been concerned about domestically, but inflation seems to be something that some people internationally have been thinking about, and we have seen some rate increases in other countries, interest rate increases and some concerns over inflation. If we see inflation tick up overseas, what effect might that have, and what's your overall global take on inflation today?

Johnson: Well, I think, if we continue to see a growing economy in the emerging markets grow and developing markets, those are countries where they're going to have more demand for natural resources. And that's one of the first things that happens if you have a larger and larger middle class, and I think that's going to put natural pressure on commodities. We can probably live with that, but even now that we've got this quantitative easing and some of the excess money is flowing into commodity, that's get a little scary.

And on top of that, we've had a few crop failures around the world this year, and so we've seen a lot of increase in commodity prices and food prices, and the bad news is that food is a relatively small percentage of the U.S. economy, but it's huge in India and China and if you get 20% to 40% of your consumer pricing index that's based on food, and food is going through the roof, inflation around the world is clearly going to be a problem, and you're probably going to need higher rates to contain some of that.

Stipp: Essentially it should be a red flag in a lot of investors' radars, even if they don't seem to see it as a problem today.

Johnson: Absolutely.

Stipp: Bob, thanks so much for joining me and for your insights on the global economy.

Johnson: Great. Thank you.

Stipp: For Morningstar, I'm Jason Stipp. Thanks for watching.

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