How the U.S. economy stacks up globally

Russell Price, CFA, Senior Economist — Ameriprise Advisor Services, Inc.

The state of the American economy

Ask the average person about the state of America's competitive position in the global economy and you'll probably hear laments about outsourcing and cheap foreign labor, the declining dollar, reliance on overseas oil and foreign funding of U.S. debt. There is a degree of legitimacy behind each of these concerns. But a true picture of America's standing in the world economy is likely being obscured by the current economic malaise. 

Sure, we face near- and long-term challenges, and China and other developing economies are likely to see stronger growth than we are for the foreseeable future. But fundamentally we are still one of the most competitive and efficient economies on the planet. In fact, the World Economic Forum, a leading global economic think tank based in Switzerland, recently ranked the United States number one in its annual global competitiveness report.¹ Here's a look "under the hood" of the U.S. economy and how it stacks up globally.

Nothing breeds fear like a good crisis

The United States is going through one of the most challenging economic crises in history. We've seen the demise of some of our oldest and most established financial institutions, including Lehman Brothers and Bear Stearns, as well as bankruptcy filings for two storied automotive companies, Chrysler and General Motors. Millions of people have lost their jobs and many millions more have seen the value of their homes and nest eggs decline substantially.

Periods of crisis naturally feed our doubts about the future. But beyond our intermediate-term challenges, the long-term outlook for global economic growth, and America’s participation in that growth, remains positive. 

We've been here before

The important thing to keep in mind is that we have experienced economic difficulties before. From peak to trough, we expect the U.S. economy to experience a total contraction of about 3.6% in the current recession. Though currently very painful, this pullback is not substantially deeper than the 3.1% and 2.9% declines we experienced in the mid-1970s and early 1980s, respectively. And it's a far cry from the 25% decline in GDP experienced during the Great Depression.

For many of us who are middle-aged, this is the sixth economic recession we've experienced so far. Assuming a normal life expectancy, we will likely see at least a few more. Our parents and grandparents experienced multiple recessionary periods, and our children and future generations should expect to see economic setbacks, too. It's just part of the economic cycle. Understanding this inevitability is one key to a successful long-term investment strategy and should spur an investor toward a properly balanced portfolio that can cushion the blow of these events when they do occur. 

We're not alone

The current economic crisis is very much a global issue. Certainly many of the problems currently plaguing the global economic picture originated in the U.S. economy. But a number of other advanced countries were largely responsible for their own economic struggles. For example, according to the International Monetary Fund (IMF), Ireland, Spain, France, the U.K., Australia and parts of Eastern Europe actually experienced housing bubbles more pronounced than our own.

Debt levels are also high across the globe and, surprisingly, the United States is not at the top of the list. The IMF projects U.S. government debt as a percentage of GDP to average 57.2% from 2006 to 2015 (as compared to a median of about 40% over the last 20 years). This level would be even higher than the near 50% debt-to-GDP ratio the U.S. experienced in the 1980s, but is still much lower than that of some other global economies. For example, the IMF projects government debt as a percentage of GDP to average 151.5% in Japan from 2006 to 2015, and 66.2% on average for the euro zone (the 16 European countries that adopted the euro as their official currency).

Other countries are feeling the effects of the current downturn, too, given the interdependent nature of today's global economy. The World Bank predicts that global GDP could contract by as much as 3% in 2009 — the first worldwide economic contraction since World War II. Growth is projected to return in 2010, but at a fairly modest pace. 

Are we going to "outsource" our future?

Outsourcing is the natural result of trade globalization, but is often viewed only through a negative lens. Since 1980, the United States has lost approximately 6.5 million manufacturing jobs. However, over this same period, the total value of our manufacturing output (adjusted for inflation) has actually grown by 70%.

What these numbers reflect is greater worker productivity via the use of technology, the shifting of labor-intensive manufacturing processes to low-wage countries and the maintenance of low labor-intensive processes (typically higher-wage positions) here in the U.S.  And despite our fear of outsourcing trends, the national unemployment rate was hovering near 40-year lows prior to the current recession.

For much of the 1980s, Japan was thought to be on track to take over as the global economic leader, as many books of the day predicted (remember how many people took up learning Japanese?).

Today, Japan's annual GDP of $4.9 trillion remains a very distant second to the U.S. GDP of $14.3 trillion. The gap is even larger when measured on a per capita basis. According to IMF data, the United States ranks sixth out of 180 countries, with 2008 GDP per capita of $46,859. Japan, meanwhile, ranks 24th, with GDP per capita of $34,100; and China, thought to be a more recent economic threat, is in the 100th spot, with GDP per capita of $5,963.  

Japan is still very efficient at producing high-quality goods, but it has slowly lost much of its competitive advantage in manufacturing over the last 25 years. A stronger Japanese yen has made its goods more expensive in world markets, and American manufacturers have combined a strong sense of innovation with the adoption of many of Japan's advanced manufacturing techniques to regain a strong position in global markets.

Currencies:  the great equalizer

China has enjoyed very strong economic growth over the last decade as it has slowly embraced capitalistic ideals. However, as exhibited by Japan’s experience from the 1980s, an export-oriented economic growth strategy is very difficult to maintain over the long haul. Wage rates tend to creep higher and the value of the exporter's currency typically rises, making its goods more expensive on the global market.

A stronger yen eroded Japan's export advantage after the 1980s and led most of its car companies to relocate at least some production to the U.S. Indeed, since China has allowed its currency some room to adjust beginning in 2005, the value of the Chinese Yuan has appreciated versus the U.S. dollar by about 17%. Although we still run a huge trade deficit with China, U.S. exports to China grew by 30% between 2006 and 2008, while our imports from China grew by only 17%. 

What it all means

Various measures of economic activity from around the globe have begun to suggest that the world economy is stabilizing. Yes, the recovery will likely be slow, but we believe the aggressive fiscal and monetary actions taken around the globe should stimulate growth over the next few quarters.

The United States has a few of its own economic and financial challenges to work through. But we certainly do not think they are insurmountable — nor are they likely a threat to America’s survival as a leading economic power over the long term.