The Global Gears in the U.S. Economy

Morningstar International Investing Presented by Morningstar.com The Global Gears in the U.S. Economy 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 he looks at in his economic studies. Thanks for joining me Bob. Bob Johnson: Great to be here. Jason: First question for you. You typically look at the U.S Economy but in today’s world it’s almost impossible to think of U.S Economy just an isolation what are some of the major things what’s the first thing that sort of comes to your mind as the global influence on how our domestic economy is going to do? Bob: Well I think the sort of trade issues probably number one on the docket. I mean the good news is the trade is only 13% of our gross domestic product so it’s a relatively smaller number than say Germany or China where the number maybe more in the 30% range but trade is still very important and the dollars that we do in trades are still very, very significant. Jason: 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? Bob: I’m still bullish on our exports. I think the dollar has certainly come in here. It has come down and which makes our goods more attractively priced abroad in the spring will recollect when dollar was strong we had some pretty bad that is big import numbers and is now as a dollar moves around we’re in a more favorable situation there so I think that puts us in a better position having the better dollar or the worst or the weaker dollar I should say. Jason: So Bob which areas of our export market specifically might be able to benefit? Bob: I think you got a couple of areas where you’ve seen some real continuing ongoing competitive advantages. Our capital goods industries, caterpillars, the dears, the ITWs a lot of the core manufacturing capital goods equipment are still needed overseas. It’s the mining economies through out China and Australia need more and more mining equipment. Those are certainly key industries whether I think it will continue to do well in an export economy. If Boeing if they can never get their act together on their 787 is a huge number, those things cost billions a piece and that’s certainly going to be hundreds of millions anyway and will certainly be a big factor in economy even 737 airliners are an important overseas product shipment and really make a difference to our numbers. Now 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. Jason: So you know given on that front there’s certainly been some resistance to weakening the dollar in the overseas community and there’s also been some concerns of possible retaliation or trade wars start to crap back again. If we see you know a lot of in fighting or fighting overseas about trying to protect in their own interest and exports how much might that effect to the U.S and you know versus other countries. Bob: Well I think everybody is going to hope well you know the exports are going to bail me out and I think you can have everybody in the world doing exports at the same time as being our savior and I think that’s where we may run into a little bit of trouble and 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 terrace 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 and in jobs lost but nevertheless the trade has generally been a helpful thing for world growth. Jason: Somewhat related to trade is the austerity measures that were seeing a lot of the developed nations Europe for example undertaking. Obviously if they’re going to be undertaking these measures, they might be buying less or might have lower exports or imports in 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? Bob: I don’t think so I think a lot of the austerity measures that you’re seeing are really to in more developed economies and as we talked about last spring we saw the European debt crisis or exports Europe are relatively small. They are 2 to 3% of our GDP. I mean Canada and Mexico are actually bigger export partners than Europe so austerity measures there probably won’t hurt us despite was Cisco may have said today that exports that the foreign governments may have hurt them a little bit but I got maybe kind of a special taste. Jason: We also got a preliminary report on some. I guess you would call them austerity measures that might need to be taken in the US that included some things on social security and on where we might have cut backs in spending. If the U.S does need to undertake and a lot of folks think that we need to undertake some cut backs and some measures of austerity what kind of impact do you think that might have for our economic future? Bob: Well I mean governments are a decent portion of our overall GDP and 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 the more decision making and more money powers in the hands of individuals which a good thing and people spend the money where they want and we can adapt and so forth and also the fact the governments become more careful with their spending whether its here are brought. I guess people have greater confidence to spend what they’ve got. People maybe has them to spend their money today because well you know I’m not really going to get social security. We all know that’s a joke but if they raise the age and when you collect it. It means to have someone and do some things to put some parameters around it. Now maybe we got a program we can trust again and that people say you know what I can spend a little more because here’s what I know I’ve got coming well sure. Jason: Is there anything of social security. I think the aging of the baby boomers and some of the shifts and demographics might seen 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 of how that affects your economic analysis? Bob: Yes. You know in the short run you can’t do a lot about it but in a 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 they even compared to China in 20 years, we may be growing faster than they are but because we tend to have a higher birth rate because we got a stabler more consumer oriented economy, we are more open to immigrants than a lot of other countries are and all of those things tend to give us a little bit better growth than most countries have. And especially when you’re in a situation with an aging, a baby boomer phenomenon if you will in Europe you’re going to run into some real problem with very few people supporting a very large age population in the U.S. Yes, there is a gap but its not nearly as bad as in most countries and even China starts to run under some problems in that demographic 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 certainly is something that goes on that’s positive for the U.S and obviously U.S productivity still remains rock solid and that certainly one of the big helps to our economy. We’ve got so much more leave it a flexibility in almost any other country so that gives us another long term advantage so people often forget when I say oh look at our deficit right today and it looks awful but we’ve got this long term secret weapons if you will productivity and population growth is far better than many other countries. Jason: 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 me have seen some rate increases in other countries interest rate increases and some concerns over inflation. If we see inflation tick it up overseas what effect might that have and what’s your overall global take on inflation today? Bob: Well I think if we continue to see a growing economy in the merging markets grow and developing markets. Those are countries where they can have more demand from natural resources and that’s one of the first thing that happens if you had a little bit larger and larger middle class and I think that’s going to put pressure natural pressure on commodities and we can probably live with that but even now that we’ve got this quantitative easing and some of the money, excess money is flowing in the commodity second to 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 one of the bad news is that food is relatively small percentage in the U.S economy but it’s huge in India and China and if you get 20 to 40% of your consumer price index based on food and foods going through the roof inflation around the world is clearly going to be a problem and you will probably need higher rates to contain some of that. Jason: So essentially it said via read flag and a lot of investors radars even if they don’t seem to see it as a problem today? Bob: Absolutely. Jason: Bob thank you so much for joining me and for your insights on the global economy. Bob: Great thank you. Jason: For Morningstar I’m Jason Stipp, thanks for watching.