Taking stock of what’s right with the United States

Taking stock of what's right with the United States Fri 10 Oct 2008 This is one in a series of articles addressing current market conditions. Below is recent commentary from Joseph P. Quinlan,  Investment Strategies Group chief market strategist, who lends perspective on the current state of the financial markets. The U.S. financial crisis has shaken investor confidence in the U.S. economy, and for good reason. After nearly a decade of excessive borrowing and lax financial regulation, the economy is in the grips of a painful deleveraging process. Bank failures, home foreclosures, credit card delinquencies — these variables and others have brought the U.S. economy to a virtual standstill. Against this dire backdrop, we thought it would be a good time to step back from the drama of Wall Street and Washington and unemotionally reassess the prospects of the U.S. economy. Below is a list of items that we believe show what is right with the United States from an economic and market perspective, offered in an effort to help investors think rationally about the economy's future. 1. The United States is the largest and most productive economy in the world.1 With just 4.5% of the global population, the United States accounts for 25% of global gross domestic product (GDP) and produces more output in a year (about $14 trillion) than the next four largest economies — Japan, China, Germany and the United Kingdom — combined. America 's economy is more than four times the size of China 's. 2. The United States is the world's leading manufacturer of goods.2 Contrary to popular media reports, the United States is still in the business of making "stuff." Indeed, the United States is a manufacturing powerhouse — ranked No. 1 in output. America 's share of global manufacturing output was 20.5% in 2006 (the latest year of available data), little changed from 1990 (22%) and nearly unchanged from 1980. China ranked a distant second (13%). U.S. manufacturing output exceeded that of Japan and Germany combined in 2006. 3. The United States is the largest exporter of goods and services in the world.3 The United States has posted a trade deficit in goods every year since 1975, a notorious economic feat. However, the deficit masks the fact that the United States is a significant exporter of both goods and services. When goods and services are combined, America emerges as the world's top exporter, with combined exports totaling $1.6 trillion in 2007, or 9.4% of total global trade. 4. The United States remains the world's favorite destination for foreign direct investment (FDI).4 Despite the chatter about U.S. outsourcing and jobs being shipped to China is this simple truth: the United States remains the most attractive market in the world for foreign investors. Why? The allure of the United States comes from many factors, including its vast and wealthy market, large skilled labor pool and transparent rule of law. FDI inflows to the United States totaled $1.3 trillion between 2000 and 2007 — the comparable figure for China was $483 billion, or roughly one-third of America 's total. America 's share of global inward FDI was nearly 16% between 2000 and 2007, versus a 5.8% share for China . Meanwhile, U.S. FDI inflows were three times as large as China 's during the 1990s. 5. America is home to the world's top global brands. More than half (52%) of the world's top 100 brands were American in 2008, according to the research firm Interbrand. Of the top 10 global brands, eight were American, giving Corporate America an unequaled global footprint relative to its international competitors. 6. The United States remains the world's technology leader. The United States remains the most innovative economy in the world. America 's risk-taking, entrepreneurial streak underpins its technological leadership — a leadership that continues to attract the best and brightest from around the world to live and work in the United States . Reflecting this dynamic, America is the largest market in the world for information technology spending on hardware, software and services. 7. The top-ranked universities in the world are in the United States.5 Though America 's public school system leaves a lot to be desired, when it comes to higher education, some of the best universities in the world are in the United States . Nearly 40% of the universities in the Quacquarelli Symonds World Rankings' top 100 universities are found in the United States , with American universities holding the top two positions as of October 2008. In the 2006-2007 academic year, American universities hosted nearly 600,000 international students, one-fifth of all international students, making the United States the top destination for foreign scholars — followed by the United Kingdom, France, Germany, Australia and China. 8. The U.S. dollar is still the world's top reserve currency.6 The U.S. dollar remains the reserve currency of choice for many nations — it accounted for roughly 65% of global central bank reserves last year. The euro ranked second, with a 25% share. While the U.S. financial crisis has served to undermine foreign investor faith in the U.S. dollar, the dollar remains strong. 9. The U.S. military is a significant resource for technological innovation. Because of its broad commitments at home and abroad, U.S. military expenditures have increased sharply during the past few years, and the U.S. military is likely to remain a major focal point for government spending for the foreseeable future; even if private firms become cautious and back off on research efforts, U.S. military research is likely to continue — and in recent decades, U.S. military research has incubated key technological breakthroughs that have gone on to be commercially feasible. Consider the Internet, a system initially developed by the U.S. military that has helped change the way the world transmits information. When assessing the U.S. economy's flexibility and capacity for innovation, the resources of the U.S. military, particularly in research, should not be underestimated. 10. The U.S. ranks No. 1 in global competitiveness.7 Based on the latest competitiveness survey from the World Economic Forum, the United States ranks as the world's most competitive economy — a position underpinned by America 's innovative capabilities and top research universities, among other variables. Whether the United States maintains its top ranking next year remains to be seen — the financial crisis, no doubt, will take some gloss off the U.S. economy. That said, the key point is that, on a relative basis, the U.S. economy remains among the most competitive in the world. The bottom line We won't deny that there are a few things broken in the United States right now, with the impaired U.S. financial sector chief among them. True, all is not perfect — America 's crumbling physical infrastructure, unwieldy health care system and debtor nation status require immediate attention. In addition, the world is not standing still; many nations — think China — are rapidly becoming more adept with technology, creating their own global brands and expanding their manufacturing capabilities. They are spending more on education and weapons and will no doubt create a much more competitive landscape in the years ahead. That said, the view is that "all is not lost", as the United States remains the most competitive and resilient economy on the planet. Our hunch is that the U.S. economy will prove to be far more resilient and dynamic than what the doomsayers would have you believe. Yes, these are difficult days for the U.S. economy, but we are bullish on the future. The foundational building blocks of the economy remain quite strong — in the end, we believe this underlying strength will help lift the economy out of its current funk.   NOTES: 1 Data source: International Monetary Fund (IMF), data through December 31, 2007 2 Data source: IMF, data through December 31, 2006 3 Data source: World Trade Organization, data through December 31, 2007 4 Data source: United Nations Conference on Trade and Development, data through December 31, 2007 5 Data sources: Quacquarelli Symonds (QS); International Institute of Education; "top-ranked" refers to both #1 and #2 rankings, according to QS ratings of top 100 universities for 2008. 6 Data source: IMF, data through December 31, 2007 7 Data source: World Economic Forum, 2008–2009 Global Competitiveness Report, October 2008