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Portfolio > Economy & Markets

Expect continuing growth of economy, markets

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The U.S. economy, now growing faster than in much of the rest of world, is good news for financial markets.

Abby Cohen, a senior investment strategies and president of the of the Global Markets Institute at Global Sachs’ Global Investment Research unit, delivered this positive assessment at the Insured Retirement Institute’s IRI Marketing Summit in New York on March 24. The two-day conference examined current issues and trends impacting the life insurance industry.

“We don’t foresee another recession in the near future — only continuing growth,” said Cohen. “U.S. stock prices now exceed 2007 levels. And the average S&P 500 stock is now trading at 17 times earnings.”

Goldman Sachs’ Economic Research unit forecasts that U.S. gross domestic product this year will grow to 2.8 percent and 3.2 percent in 2015. The chief contributors to GDP growth are residential fixed investment and business fixed investment, which are expected to increase by 5.6 percent and 6.5 percent, respectively this year; and by 12.4 percent and 6.8 percent in 2015.

In contrast, government spending remains a drag on the economy. Goldman’s research unit anticipates this sector will contract by 3.0 percent 2014 and 1.4 percent in 2014. Personal consumption, still the largest component of GDP, will rise by only 2.5 percent and 2.8 percent, respectively, this year and next.

“The U.S. growth rate puts us near top of the pile among most economies worldwide,” said Cohen. “It’s still a good time to be investing in financial assets.”

“Residential investment — new housing construction — was in recession more than a year before the financial crisis,” said Cohen. “But it has been growing well since end of recession. Demand for housing is increasing.”

Cohen highlighted other indicators that reflect an improving economic situation in the U.S. six years after the Great Recession. Among them: declining consumer debt service payments as a percentage of disposable personal income (now about 10 percent); and rising spending on information technology. Three-quarters of companies surveyed by Goldman Sachs last January are planning to invest as much this year, if not more, in IT.

She noted also that the U.S. exports, which now total $527.1 billion, represent the “fastest growth sector” of the U.S. economy. One-third of the exports go to Canada (18.9 percent) and Mexico (14.4 percent); the European Union (16.6 percent), Central/South America (11.7 percent) and China (7.8 percent) are among other America’s other top importers.

Cohen explained the robust exports by noting that:

  1. The U.S. continues to produce goods and services not available elsewhere; and
  2. High quality U.S. goods in particular remain much in demand worldwide.

The growing economy has not generated, however, a commensurate increase in employment. “It has taken almost [five years] to restore the economy and markets to pre-recession levels,” said Cohen. “Our GDP is higher, but we’re producing goods and services with fewer workers.”

Those hardest hit, she added, are the less educated. Individuals with only a high school diploma or an associate degree from college are facing an unemployment rate topping 6 percent. This contrasts with less than four percent among people with a bachelor’s degree and higher. Unemployment is especially high among young adults, ages 20-24 (about 12 percent).

Also buffeting the economy is median (inflation-adjusted) household income, which has been trending lower since 2000. Again, household income correlates with educational attainment: Those with a four-year college degree or greater are the best-paid.

Cohen observed also that technology-driven wages are higher and have risen more quickly than in the economy generally.

“New York City — home of the financial crisis and of financial services — has had a dramatically stronger employment picture than the rest of U.S.,” said Cohen. “Because of significant technology investments by companies in New York — and the resulting return on investment and return on earnings — growth in technology wages have vastly outstripped the rest of country. And the beneficiaries are not just the well-educated.”

Cohen cautioned that some negatively trending indicators tracked by Goldman Sachs could check future growth. Example: Companies capital usage — capital expenditures, research and development — has fallen to an estimated 44 percent in 2014, down from nearly 50 percent a decade ago.

Conversely, companies are dishing out more in dividends (an estimated 17 percent this year) and stock buybacks (27 percent). Worldwide, U.S. R&D spending in percentage terms (less than three percent) is among the top third of countries—behind global leaders Israel, South Korea and Finland, all of which top 3.5 percent.

Turning to the nation’s balance sheet, Cohen noted the Congressional Budget Office projects a reduced federal budget deficit as a share of GDP in coming years: 3.0 percent, 2.6 percent and 2.8 percent in 2014, 2015 and 2016, respectively.

Also shrinking is the size of the U.S. banking sector. Bank assets as a percentage of GDP is now 81 percent, significantly below the percentages of other developed economies. Among them: Luxembourg (2,581 percent of GDP, a ratio 31.7 times that of the U.S.), the U.K. (557 percent, 6.8x), Germany (324 percent, 4.0x), and China (243 percent, 3.0x).

“The U.S. has moved aggressively with a tough-love approach to banking regulation,” said Cohen. “That has helped to re-establish confidence in our banking sector. People concerned about U.S. financial institutions should focus on other countries that have significantly larger banking sectors relative to GDP and less robust banking regulation.”


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