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#137 Projected Changes in the Economic Order

It is important to take a longer term view of global economic prospects that looks beyond the short-term ups and downs of the economic and political cycle, which are indeed very difficult to forecast.

America progress through the 19th and early 20th centuries to become the largest economy in the world despite a civil war, various other conflicts with foreign powers, three presidential assassinations, and numerous economic and financial crises. These forces also helped global economic growth to bounce back strongly from two world wars and a Great Depression to reach record levels in the post-war decades.

The world economy will more than double in size between now and 2050, far outstripping population growth:
Emerging markets will dominate the world's top ten economies (GDP at PPP):
By 2050 we project China will be the largest economy in the world by a significant margin, while India could edge past the US into second place and Indonesia have risen to fourth place. The EU27’s share of global GDP will have fallen to below 10%. 

#136: The Future of Global Trade

Trade tensions now dominate the headlines. Meanwhile deeper changes in the nature of globalization have gone largely unnoticed. Globalization has now reached a turning point even though these changes  were obscured by the Great Recession. The purpose of this posting is to summarize what are the seven key developments that are now taking place that describe how the global trade in goods and services are evolving from the current levels that deliver $161 trillion worth of economic value.

1. Goods-producing value chains have become  less trade-intensive. Output and trade both continue
to grow in absolute terms, but a smaller share of the goods rolling off world’s assembly lines is now traded across borders. Between 2007 and 2017,  exports declined from 28.1 to 22.5 percent of gross
output in goods-producing value chains.

2. Cross-border services are growing more than 60 percent faster than trade in goods, and they
generate far more economic value than traditional trade statistics capture. Uncounted
aspects (the value added services contribute to exported goods, the intangibles companies send
to foreign affiliates, and free digital services made available to global users). National statistics attribute 23 percent of all trade to such services, but including these three channels would increase their share to more than 40%

3. Less than 20 percent of goods trade is based on labor-cost arbitrage, and in many value chains, that
share has been declining over the last decade. Meanwhile, a shift in the global value chains are
becoming more knowledge-intensive and reliant on high-skill labor. Across all value chains, investment in intangible assets (such as R&D, brands, and Intellectual Property) has more than doubled as a share of revenue, from 5.5 to 13.1 percent, since 2000.

4. Goods-producing value chains (particularly automotive as well as computers and electronics) are
becoming more regionally concentrated, especially  within Asia and Europe. Companies are increasingly  establishing production in proximity to demand.

5. Goods-producing value chains (particularly  automotive as well as computers and electronics) are
becoming more regionally concentrated, especially  within Asia and Europe. Companies are increasingly establishing production in proximity to demand.

 6. China and other developing countries are consuming more of what they produce and exporting a smaller share. Emerging economies are building more comprehensive domestic supply chains,
reducing their reliance on imported intermediate inputs. Lower global trade intensity is a sign that these countries are reaching the next stage of economic development. Global value chains are being
reshaped by cross-border data flows and new  technologies, including digital platforms, the Internet
of Things, and automation and AI. In some scenarios, these technologies could further dampen goods trade while boosting trade in services over the next decade.

7. These trends favor advanced economies, given their strengths in innovation and services as well as their highly skilled workforces. Developing countries with geographic proximity to large consumer markets may benefit as production moves closer to consumers; those with strengths in traded services also stand to gain. But the challenges are getting steeper for countries that missed out on the last wave of globalization. As automation reduces the importance of labor costs, the window  is narrowing for low-income countries to use labor-intensive exports as a development strategy. Regional integration offers one possible solution, and digital technologies also hold possibilities for new development paths.

The consequences of these trends are summarized in the following tabulation:


Global Innovators (131 million people): Account for 13% of global output with only 4% of global labor.  These are high income populations.
Labor intensive Goods (101 million people): 3% of global output with 3% labor of labor.
Regional Countries (189 million people): 9% of global output for a 5% of labor.
Resource intensive Countries (915 million people): 12% of global output produced by 28% of the population.
Labor intensive Services (742 million people): 17% of global output produced 23% of the population.
Knowledge intensive Services (153 million people): 13% of global output produced by 5% of the population.

SUMMARY:

Total global employment in the global economy is presently 3,275 million out of a current  total human population of 7,691 million. With a rising population of people under the age of 20 and over 65, only about half of the remaining global population of 4,416 million can be considered to become someday an active part of the global economy. That will take place when a rise in prosperity of the rest of the currently impoverished world will make that feasible

It will be the purpose of these postings to  concentrate on the roles and missions of "Global Innovators" as well as how it will supports the growth of "Knowledge Intensive Industries". It will be these sectors that will propel a rise from the current global output of $161 trillions to higher future levels through rising in productivity of other sectors.


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Extracted from:  https://www.mckinsey.com/~/media/McKinsey/Featured%20Insights/Innovation/Globalization%20in%20transition%20The%20future%20of%20trade%20and%20value%20chains/MGI-Globalization-in-transition-The-future-of-trade-and-value-chains-In-Brief.ashx


#135: How Trustworthy is the US Economy?



A retired investor, at age of about 60-70 years, faces added life expectancy of 25 to 35 years (or 30 to 40 years if spouse included). Retirement funds are then expected to support living expenses for the remaining lives. Retirees should now examine the trustworthiness of the US economy until 2040. Can the economy sustain them over that many decades?

What constitutes adequate retirement assets should include potential investment gains but also inflation (over 3%/year in the US). In addition retirees should also anticipate rising medical costs. What are then the required savings that would keep a retired person with a satisfactory income?

There is no question that the US economy is superior to all others.  The top five countries rank their inflation-adjusted GDP as follows:(1)



The deflated GNP of Japan, Germany, United Kingdom should keep their slightly rising economies at current levels. An aging population, lower birth rates and social insurance should assure acceptable retirement living. Meanwhile, China GDP is rising but will not come close to the wealthy US:(1)




A continued prosperity of the US is assured. Even the higher GDP annual growth rate for China does not show as sufficient growth rate to assure the narrowing of the current GDP gap with the US. There is also a very large gap between China and the US in GDP per capita. The narrowing of such differences would be unrealistic:(1)


There are, however adverse trend that curtail US economic leadership. The US balance of trade has been consistently negative - imports exceed exports:(1)



A further detraction form the US economy is the government deficit:(1)

With the trade and budget deficits near $1.4 Trillion, the US economy carries a liability that current tax collection deficits are unlikely to correct. That is evident in the current US tendency to take advantage of existing wealth by increasing debt that defers any settlement into the future. Such deferred liabilities have also immediate effects on current affordability of social expenditures. 2017 spending for real US personal consumption is $12.6 Trillion.(2) The trade deficits plus government spending deficits now detract over 10% that would have been otherwise available for US consumers immediately.  

The immediate prospects of increased debt and deficits are not good. Though the US wealth is still enormous, does that constitute that a peak in economic history or only a rebalancing of what now constitutes an indefinite continuation of exorbitant advantage as compared with other nations?

Summary:

There is no question that the present wealth of the US economy makes it superior to other countries. Whether families can benefits from such wealth is a matter of a personal accumulation and distribution of assets. Whether individual retirees can actually take advantage of so much wealth depends largely on personal circumstances. The fact is that the US still remains as the most prosperous country in the world. The US has by far more millionaires than any other nation.

In 2018 we may have possibly have reached the zenith of our progression from a poor country to the present high levels of prosperity. Rising deficits and escalating public and private debt may be one of the indicators of decline, while the rise of China may offer a challenge to take over US global leadership.

In the next few years the best strategy for the next 30+ years of retirement is to safeguard retirement assets against losses provided that a modest but low-risk income can be assured. The heady investment gains realized from 1950 through 2000 cannot be repeated. 

So far the US economy is trustworthy for the proximate future. What may happen in 2040 should be seen as a future that will generate new geopolitical risks for the US.   














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   (1) http://databank.worldbank.org/data; (2) https://fred.stlouisfed.org/







Post 134 What Supports the Current Rise in the U.S. Stock Market?


Deregulation and tax cuts are bullish for the US economy as well as for corporate earnings and stock prices. On the other hand, the ballooning federal deficit—attributable to the tax cuts and spending increases—is putting upward pressure on bond yields at the same time that the Fed has moved to raise interest rates and taper its balance sheet.(1)

S+P 500 earnings got a big boost from the tax bill passed at the end of last year. The Tax Cut and Jobs Act (TCJA) lowered the federal statutory corporate tax rate to 21% from 35%. Since its enactment raised earnings expectation have been projected for the next year:



During Q1 and Q2 of this year, S&P 500 operating earnings in aggregate jumped 25.9% y/y to $1.25 trillion and 25.3% y/y to $1.31 trillion, respectively. S&P 500 revenues per share increased impressively for the same periods, by 9.4% and 10.3%:


Bullish deregulation boosting small business confidence. Deregulation, which started early last year, might amount to $4 per share in additional earnings.

The monthly survey conducted by the National Federation of Independent Business (NFIB) shows that significantly fewer small business owners have been reporting concern about government regulation and taxes. The earnings component of the NFIB survey is the highest on record since the start of the data during 1974:


There has been ample cash flow to finance capital spending, share buybacks, and dividends. Firms are using incremental cash flow for the short-term benefit of shareholders rather than investing in future earnings potential. Buybacks and dividends have been about the same as after-tax operating profits for the S&P 500 in recent years.

There has been a record amount of corporate cash flow, provided by depreciation allowances, that has been fueling corporate capital spending. Therefore capital expenditures are at a record high. Private nonresidential fixed investment in real GDP rose solidly by 8.7% during Q2, following an 11.5% gain during Q1. There has been plenty of funds to finance capital spending, share buybacks, and dividends.

Summary:

No President has ever provided this much fiscal stimulus at this stage of the business cycle. In the past, such stimulus was provided during recessions or early recoveries, when the unemployment rate was at a cyclical high, not when it was near previous cyclical lows as it is today. 

Trump is making a very big bet on supply-side economics. The idea is that tax cuts will boost growth by boosting productivity, so inflation should remain subdued. That could work as long as growth isn’t weighed down by rising interest rates. If inflation does come back, then the latest supply-side experiment will end very badly indeed.

(1) This analysis is derived from