Jeffrey Rosensweig, an established Economist and Associate Professor of International Business and Finance at Emory University, presented an enlightening, non-biased, 2019 Economic Outlook on March 14, 2019.
The major economies will grow, but grow very modestly, and in some cases, there will be a deceleration. However, there is great uncertainty and a predicted slowdown in the US Economy in 2020. If we make it to July 2019, it will be the longest period of expansion in US History (10 Years since we started recovering from the Great Recession in 2008 & 2009. Jeff declares the stock market always anticipates and is often good leading indicator of the economy. For example, it hit a peak in October 2007 – people were suspecting something was going to go wrong and they were right, Lehman collapsed.
Economists are looking for a US slowdown in the second half of 2019, but not necessarily a recession. Since Trump has been in office, we have achieved 3% growth in the past year (4% target during campaign). This was an acceleration due to tax cuts. People see this as a one-time effect, but it’s already hit and makes growth faster and brings us to higher level. On the flip side, we face the aging demographic which stints growth. When baby boomers retire, it’s hard to achieve 3-4% growth. The Trump administration says they will continue to achieve the 3% growth; however, people are looking for this deceleration and the growth rate to be closer to 2%-2.2% from now forward. Baby Boomers retiring hinders growth, but Millennials are entering the labor force, which has saved us.
India passed China a few years ago to become the fastest growing economy on earth. It has been growing at 7.2% per year and forecast to continue for a while. If you grow fast, it’s an exponential curve – not linear, maintain fast growth at fast rate. When you reach a high level, it’s hard to grow fast which is what China is experiencing. China is growing at 6% and forecast to decelerate to 5% or 4.5% (still much faster than US and Japan). In India, production per capita, also known as productivity, is low and is on the rise. India, although a larger economy, still has a lot of room for productivity growth since they don’t have as many robotics, applications etc. as China yet, but China’s rise started much earlier than India.
Why is India growing at 7.2% and not 7%? First, it’s more accurate, but Jeff thinks, the “Rule of 72” applies. (The Rule of 72 is a simple way to determine how long an investment will take to double given a fixed annual rate of interest. By dividing 72 by the annual rate of return, investors obtain a rough estimate of how many years it will take for the initial investment to duplicate itself) – India’s growth rate has doubled in the past 10 years and will likely double again, until it decelerates.
Jeff’s graph illustrates that when the US slows down, Mexico slows down and vice versa. This is due to the ties we have of being in a free-trade area (NAFTA) and being contiguous to each other. It is much easier to send goods by truck or train versus via container ship around the world. Over 80% of what Mexico exports to 200 countries, comes to the US. Jeff points out that Japan is also growing and should continue to grow; however, they will also be hit. Japan is aging and they didn’t have a millennial generation like the US. A similar pattern is present in Europe due to small family sizes.
US GDP RATE
To give Trump credit, the US has had quarterly growth rates. When they announce the growth rate, it’s the inflation adjusted GDP or total production. When the growth rate is announced, the markets react. We compare the growth from the quarter before to the next and then annualize it. Trump achieved his 4% Growth Rate right after the tax cut (Trump gives tax cuts, deregulation, Fed was raising interest rates, but have backed off lately etc.), but it slowed down, and the annual growth rate was only 3%. The data are seasonally adjusted, but it is not easily to adjust perfectly. Jeff suggests that it is often easier to look at exports vs growth rate because of the varying adjustments.
THE US JOB MARKET
Manufacturing has lost one quarter of total jobs. These jobs peaked in 1979 during the Carter Era and the US has been shedding Manufacturing ever since, which leads to the anger in China and Mexico. The 80% loss of jobs is due to technological progress and 20% is due to outsourcing (to China for example). Even China is losing manufacturing jobs, so manufacturing jobs are way down.
The US is essentially a cyclic economy mostly driven by construction. During the recession in 2001 (after dot-com crash), people did not spend much. This was exacerbated by the September 11th attacks and lack of travel. Most industries experienced loss of jobs. To stimulate the economy, George W. Bush gave tax cuts, while Greenspan brought interest rates down to 0%. The US got out of the recession and we created jobs. But then, The Great Recession hit – housing bubble, financial crisis with Bear Stearns & Lehman, shorting of mortgage bonds, construction crashes etc. Financial activities experience same pattern as construction with time lag. Boom and Bust cycle in construction (with wildest swing). What people don’t realize is with record expansion of the economy, construction has come back dramatically. In Metro Atlanta, you will see this with the quantity of cranes.
Jeff suggests aiming our kids towards Healthcare for employment growth or Professional Services. Leisure & Hospitality has also risen due to millennial behavior. More people are eating out and filling up hotel rooms which is backed by the number of jobs in leisure & hospitality. Jeff notes the Government has not experienced significant job growth and was downward during the US budget sequestration. Fortunately, most of the growth has been in the private sector. Finally, Jeff points out that retail jobs are cyclical and sales are going up 5% a year but there is an Incipient Trend – growth of retail sales (Amazon), however not of jobs.
JOB OPENINGS VS. UNEMPLOYMENT RATE
Jeff references the CFO Forum Survey, and how the audience’s top concern is the war on talent. During The Great Recession, unemployment hit 10%. Essentially we had 15 million unemployed individuals and only 3 million job openings. Now for the first time in our recorded history, there are more job openings than there are unemployed people. Right now, there is a record high number of job openings in the US and the unemployment rate is just under 4%. Notice the negative correlation – Economy falls into recession, unemployment up, laying off people, nobody looking to expand business, openings down etc.
Jeff states that currently in the tight labor market, if you have required skills needed, you can ask for wage increases. The latest issue lies in the skills gap. There are 7.3 million openings and 6.2 million actively looking for work. At the bottom of the business cycle, jobs go down and the unemployed folks worked in other industries. Now that the economy has grown, there is very little cyclical movement and it’s an issue when employers are looking for a very specific skill set.
Bernanke brought interest rates down short term, but we were worried about second recession. Greenspan also brought rates down, but kept them low too long and housing bubble started. Nobody wanted to be in money market or buying bonds. Interest rates came down dramatically. Greenspan noticed a speculative bubble was forming but left it too low for too long. Moving in 25 basis point increments, continually raising short term rates. Forecasters are saying the economy is really slowing down, furlough didn’t help, maybe no interest rate increases in the next year.
There is a longer-term trend into lower interest rates. During Quantitative expansions, the Fed would buy bonds to get interest rates down. Economists think inflation has been beaten out of the system. Jeff suggests there seems to be a worldwide savings glut (Bernanke’s belief), and firms don’t want to absorb savings and invest in new factories etc.
Exchange Rate Volatility
When exchange rates go up, other currencies are gaining value against dollar. This can be misleading because the dollar was very strong in 2001-2002. Then Enron and Worldcom hit, while we always thought the US Financial system and controls was solid.
A lot of investors thought they would get their money back in Euro or Canadian dollars via US instruments (i.e. stocks bond and bank accounts). For example, if other currencies went up, they could by more dollars. A lot of currencies came down, and people bought US dollars to park in US treasuries. Around 2016 people felt more confident in other currencies but in June of 2016 it dropped dramatically.
In June of 2016 the British Pound dropped dramatically due to Brexit. Jeff claims this is NOT strategic for the UK as they went from an open market, and seemingly will cut themselves off. London was a global financial capital because banks could do business freely. This will no longer be the case if Britain leaves the European Union. Now companies must decide if they want to go to Frankfurt, Amsterdam or Dublin etc. As things stand, the UK is due to leave the European Union on April 12, 2019, regardless of whether there is a deal with the EU or not.
Overall, several currencies have come down against the US dollar in the last year. For a while they went up, due to the “safe haven” effect = when things get tough people move into the dollar.
US TRADE DEFICIT
We have a huge trade deficit with China. The US had record size deficit in 2018 and Trump got criticized. Even though he put Tariffs on Chinese goods, we still have a huge deficit with China and it is only rising. The deficit is 400B+ made up of physical goods and commodities. On the other hand, the US has a surplus on services. We sell financial, legal, and tourism services to the world. Jeff notes that 40% of Emory’s MBA students come from all over the world.
ABOUT THE SPEAKER
Jeffrey Rosensweig is the Director of the John Robson Program for Business, Public Policy, and Government at Goizueta Business School of Emory University. Previously, he served for six years as an Associate Dean. An international business and finance professor, he focuses on global investing and business in the global economy. He also specializes in financial, macroeconomic, and business forecasting. Jeff is a frequent keynote speaker to leading executives on topics related to global economic and financial trends and forecasts, in 2000, Dr. Rosensweig was elected a lifetime member of the U.S. Council on Foreign Relations.
Professor Rosensweig is often quoted in the national business press, including FORBES, FORTUNE, and BUSINESSWEEK. He has appeared nationally on ABC WORLD NEWS TONIGHT and GOOD MORNING AMERICA, the NBC TODAY SHOW, NBC National NIGHTLY NEWS, NIGHTLINE, BLOOMBERG TV, and he is a frequent economic commentator for CNN. He has published numerous papers in academic and business journals. He has written three books, including the critically-acclaimed Winning the Global Game: A Strategy for Linking People and Profits.
Active in executive education, Dr. Rosensweig was recently selected by the Wall Street Journal as one of the 12 favorite professors in all Executive MBA Programs worldwide. Dr. Rosensweig received his M.A. and B.A. in economics (summa cum laude) from Yale University and a Ph.D. in economics from Massachusetts Institute of Technology (MIT). Further, he received a master’s degree in philosophy, politics, and economics as a result of two years of study at Oxford University as a Marshall Scholar. The British Government has selected him to serve on the Marshall Scholarship Selection Committee for 16 years, and during the past six years has appointed him Chairman for the Southeast.
Before Emory, Dr. Rosensweig served as senior global economist in the Research Department of the Federal Reserve Bank of Atlanta. Other previous experience includes serving as an economic consultant to the Government of Jamaica and teaching international finance at Yale’s School of Management. Elected by the faculty in 1996, Professor Rosensweig served for 12 years as Chairman of Emory University’s Center for Ethics. He has also been the Pack Leader for a multicultural group of over 100 Cub Scouts.
CFO Forum Atlanta
International Monetary Fund
The World Bank