July 9, 2013

The Case for America’s Economic Future

Wells Fargo Advisors believes investors underestimate America’s resilience and future prospects

A man at a recent rally for immigration reform. (Photo: AP) A man at a recent rally for immigration reform. (Photo: AP)

With the spirit of optimism that made Wells Fargo’s stagecoach a symbol of its pioneering outlook, the firm’s advisory unit has issued a manifesto of its confidence in the resilience of America’s economy for clients and prospects who may have been sitting on the sidelines in recent years.

Called “A Case for America,” the new Wells Fargo Advisors report rebuts what it describes as a pervasive, media-fueled sense of pessimism that has accompanied America’s struggle to recover from “the Great Recession.”

While continuing talk about a “new normal” and “the lost decade” breeds this negativity, the Wells Fargo Advisors report makes the case that profitability, innovation, resources, stability and America’s people argue instead for a broadly positive view of America’s future.

The bottom line is at the very top of Wells Fargo’s argument, noting that U.S. corporate profits are at an all-time high, surpassing $1.7 trillion in 2012, accounting for more than 11% of GDP, more than twice their proportion of GDP during the recession.

Indeed, last year was the third consecutive record-breaking year for after-tax profits, which hovered at around $1.3 billion before the financial crisis. U.S. corporations today are flush with cash, and more than 80% of S&P 500 companies are now paying dividends, a 13-year high.

The report attributes this profitability to an improving business climate and a focus on cost containment, and notes that the U.S. has 10 companies represented among the world’s 25 most profitable—twice more than second-ranked China—led by Exxon Mobil and Apple.

A second factor undergirding the strength of U.S. corporations is a culture of innovation, which is responsible for America’s No. 1 rank in research and development in eight out of 10 technology areas, according to a 2012 survey of scientists and engineers. America’s forecast spending on R&D for 2013 is nearly twice the level of second-ranked China, and American companies make up nearly half of the top 100 global innovators, according to a recent Thomson Reuters study.

“Whether using a tablet, smartphone, or a PC on a wired or wireless network, you are likely using hardware, semiconductors, an operating system, and applications designed by American companies,” the report says.

That innovation has spread notably into the resources sector of America’s economy, with horizontal drilling and hydraulic fracturing transforming the energy sector in recent years. Wells Fargo cites forecasts that the U.S. is now expected to surpass Russia in natural gas production around 2015 and Saudi Arabia in oil production around 2020.

In agriculture, our farmers continue to preside over bumper crops that should generate $17 billion average annual trade surpluses through 2022, while U.S. companies are now making renewable products that support 100,000 jobs, according to the USDA.

The long-awaited recovery in U.S. housing together with an improved banking sector spell a new stability in the economy, according to the report.

Unlike the pre-crisis situation, housing is now affordable, according to an index showing that families earning the median income currently have more than sufficient income to qualify for a mortgage on a median-priced home with a 20% down payment.

That together with low mortgage rates, a drop in foreclosures, tight housing supply and lower unemployment have generated a real estate recovery that appears sustainable.

In the meantime, U.S. banks have been recapitalized and bank failures have declined to much lower levels than seen in the midst of the financial crisis. Annual stress tests “allow us to conclude that major U.S. banks have enough capital to potentially withstand another significant crisis,” says the report, which also states “we believe our domestic banking system is now one of the strongest in the world.”

The final leg on which underappreciated U.S. strength lies is America’s relative youth compared with the rest of the world. While America is aging, and the proportion of its population aged 65 and older is expected to reach a quarter of the population by 2040, that is a far more favorable ratio than economic competitors Japan (43.3%), Germany (39%), Korea (38.6%), Canada (31.5%) or China (27.9%).

Significantly, the percentage of young and working-age Americans is also expected to increase 42% through 2050, while those demographic brackets are expected to shrink in China (10%), in Europe (25%), South Korea (30%) and Japan (40%). The report also states optimistically that America still values education, and though it needs to improve in elementary science and math competitiveness, American higher education ranks among the most advanced in the world.

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Check out Niall Ferguson: 4 Reasons America Is Falling Apart.

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