The Independent Market Observer

6/17/13 – An Updated Look at the Long Term

Posted by Brad McMillan, CFA, CAIA, MAI

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This entry was posted on Jun 17, 2013 11:53:34 AM

and tagged Fiscal Cliff, Market Updates

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Many of my posts over the past several weeks have focused on immediate, here-and-now issues—or, at most, ones we’ll be seeing over the next couple of months. With summer here (finally!) and sunshine cheering me up, I thought I’d take another look at the medium- to long-term future—which was good the last time I looked, about two years or so ago, and which has since gotten even better.

Two years ago, when I first gave a presentation on the longer-term outlook for the U.S., I identified several key issues: capital, raw materials/resources, manufacturing, energy, geography, markets, and labor. The U.S. was in a relatively superior position compared with its competitors in all of those areas, except for capital.

Since then, we’ve made substantial progress in that regard. Between the fiscal cliff deal’s tax increases and the sequester spending cuts, according to the Congressional Budget Office, the deficit is set to decline to 2.1 percent of GDP by 2015—down from 7 percent in 2012, and below expected economic growth levels. The problem isn’t solved, as the deficit will rise again as the boomer retirements really start to hit, but it remains a solvable problem, and one that’s no longer as urgent. We are also much better positioned than almost any other economic power in this respect.

The U.S. position in resources and energy has continued to improve since my original presentation. At that time, I talked about the promise of fracking to restore domestic energy production. The results have far exceeded my expectations, to the point that the International Energy Agency is now talking about the U.S. becoming energy independent. Beyond the multiple positive effects of increased oil and gas production in the U.S., growth of alternative energy sources—which I’ve written about extensively in this blog—has laid the groundwork for a transition away from oil and gas, starting to secure the long-term future.

Another trend I’ve highlighted before, the onshoring or reshoring of U.S. manufacturing, has also made substantial progress. The most recent poster child for this has been Apple, always eager to get in front of a trend. Two factors are driving this movement, both sustainable. First is the developing cost competitiveness of U.S. labor on a productivity-adjusted basis. With wages rising much faster, although from a lower base, in China and other countries, the higher productivity of U.S. workers has made them very competitive on a cost basis. Along with the other advantages of domestic production—no intellectual property risk, lower shipping costs, quicker time to market, better communication—this has prompted companies to start bringing manufacturing back to the U.S.

The second factor behind the onshoring trend is the growing use of U.S. manufacture as a competitive advantage in marketing. I have a pair of jeans that are better quality than the Levi’s I used to buy, and I will say that the fact they were made in the U.S. did influence my purchase. Better quality, same cost, made here—why would I buy anything else? This is a trend that will continue to grow.

The last point I will touch on is labor. A couple of years ago, I noted that the U.S. had a superior demographic profile—although our working population was set to decline, we were much better off than other countries. This continues; since then, China’s working population has peaked and Europe’s continues to decline. We remain the best positioned demographically, and, again, I expect that to continue—or even improve—as the U.S. immigration debate resolves itself.

None of this even begins to consider the superior economic position the U.S. now finds itself in with respect to other countries. Europe continues to flounder, and China faces slowing growth and a problematic transition to consumer-led growth as its investment-led growth program falters. As I’ve said before, the U.S. is in the midst of what looks like a sustainable, if slow, economic expansion, which should widen the gap even further.

Overall, while we continue to face challenges, the U.S. appears to be through the worst of the crisis. The next big hurdle will be the Federal Reserve’s withdrawal of its stimulus program, accompanied by the next round of federal budget and debt negotiations. Like the past challenges we have experienced, both of these will generate lots of headlines but—as in the past—will most likely be resolved successfully. Risks in other parts of the world remain, particularly in Europe and China, but while the effects of these could be substantial, the U.S. is among the best positioned to ride out any troubles.

Cautious optimism, rather than simply caution, remains the appropriate stance for U.S. citizens. This is a significant change from several years ago, when I would have said caution alone. But the swing toward optimism continues, even if shorter-term concerns mean that we’re not quite there yet.

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