We American workers work hard for our money and our money should work hard for us.
Our country was built by hard workers. The second industrial revolution (from the late 1880s to 1970) brought the U.S. from an insular growing nation to the greatest country in the world, a distinction we still hold. Our country has led global prosperity for seven decades since WWII based on a multinational system of institutions, rules and alliances. Now that prosperity is in jeopardy.
For the last 15 years, economic growth in advanced nations has been weak. The US is still adding jobs, but with reduced productivity. From 1947 to 2000, the per-person GDP rose by 2.2% per year. Since 2001, it’s been less than 1%. 81% of the US population has had flat or declining real income in the last decade. The slowdown in growth has two main components; people working fewer hours and less economic output (productivity) for each hour of labor. Northwestern economist Robert Gordon, whom we discussed at last fall’s seminar, argues that the third industrial revolution which includes computers and the internet has not had the same transformative impact on growth as cars, electricity, airplanes and indoor plumbing did.
American workers’ jobs have changed considerably in the last four decades. In 1979, 19% of our nation’s jobs were in manufacturing, today only 8% are in manufacturing. Yet, the U.S. share of global manufacturing has held at 20% for the last 40 years with American companies getting more done with fewer people. Globalization has helped boost our GDP.
U.S. multinational businesses pay their U.S. employees 25%-30% more than domestic employers do. U.S. manufacturing workers whose jobs depend on exports earn 18% more. Cheap imports save the average U.S. household about $10,000 annually. Every month, the U.S. economy gains and loses 5 million jobs because of innovation, competition, changed consumer tastes and trade. Lots of winners and losers.
Hence, there is a huge difference in how Americans see the economy. Higher education means higher hopes for financial prospects. The poor are understandably more worried about retirement income. Those living in the South and West are understandably more optimistic than those in the “Rust Belt.”
Millions of Americans and Europeans who have not participated in globalization and who are either unwilling to or incapable of change, want to close the door to their nation. Politics is moving from Republicans vs. Democrats or left vs right to “open” vs. “closed.”” Economic dislocation and demographic change (aka “too many immigrants”) has millions thinking it’s time to pull up the “drawbridges.” In Poland and Hungary, the “drawbridge-uppers” are firmly in place. In France, Marine LePen, thinks the opposite of “globalist” is “patriot.” The populist vote in Europe has nearly doubled since 2000 despite the fact that trade alliances have long been a huge benefit around the world. Both U.S. political parties used to back free trade. Now they bash it- neither Donald Trump nor Hillary Clinton supports the Trans-Pacific Partnership (“TPP”), which would be the largest regional trade accord in history. When you add an anti-globalization movement to the existing productivity decline in the U.S. and Europe, world growth will likely continue to fall.
Fortunately, the U.S. economy has held up fairly well- adding jobs driven by consumer spending. However, as Federal Reserve Vice Chairman Stanley Fischer outlined in his concerns at the Jackson Hole summit, there is concern for longer-term prospects for the U.S. economy. He called for more public investment in education and infrastructure. Both Presidential candidates favor infrastructure spending. Harvard economist Larry Summer suggests that paying workers to build roads and bridges creates more “demand” as workers become reattached to the work force. And this demand increases supply and produces more growth.
Conclusion: Today, with reduced productivity and anti-globalization sentiment strong, we expect slower world growth and lower inflation to continue. This means lower nominal equity returns. And, there are other continuing concerns, such as global terrorism and stock valuations. Economists and forecasters are great at overstating the probability of worst-case scenarios. While, most often, their “expert predictions” of dire consequences don’t occur, we all have to endure the constant negativism from the media.
We recommend that investors remain invested in an appropriate asset allocation to obtain a reasonable return based on their risk profile. In the long-run, equity markets have produced an equity “premium” over fixed income returns (aka a “real return” above inflation). Fixed income and alternatives have continued to provide a counter-balance to equities, traditionally remaining stable or going up when equities decline. We’ve all worked hard for our money, and even in this new investment environment, we need to keep it working hard for us.