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Commentary: Is America Where The Growth Is?


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COMMENTARY: IS AMERICA WHERE THE GROWTH IS?

Chaos in Russia, depression in Japan, troubles in Brazil. All around the globe, countries are flirting with economic disasters--and policymakers are trying to avoid a global meltdown that could pull the U.S. into recession as well.

Against this backdrop, U.S. corporate execs and investors may want to rethink some basic assumptions. For many years, the conventional wisdom has been that foreign growth would be the driving force for profits and returns in the future. The U.S. was characterized as a "mature" economy, with limited growth potential. By contrast, the emerging markets were supposed to offer rapidly expanding demand from a growing population and enormous investment opportunities.

Well, guess what? So far in the 1990s, it hasn't turned out that way. Since 1993, foreign trade has cut about 0.4 percentage points off annual gross domestic product growth, rather than adding to growth, as many analysts expected. Over the same stretch, domestic profits have risen by 84%, outpacing a 79% increase in profits from overseas operations, as measured by the Commerce Dept. And the U.S. stock market has left its foreign counterparts in the dust, even before the Asian crisis and emerging-markets meltdown. From fall, 1993, to the start of 1998, the Standard & Poor's 500-stock index rose 111%, while the rest of the world's stock markets rose only 33%, according to Morgan Stanley Capital International.

Part of the difference was unanticipated weakness abroad. But more important, the U.S. economy has turned out to be much more dynamic than most forecasters expected--more growth, bigger productivity gains, stronger wage increases, better profitability. For example, one 1993 forecast projected that corporate operating profits, adjusted for inflation, would rise by only 4% over the next five years, and real wages would fall. It turned out that real profits rose by 55% and real wages jumped by some 4%, helping to fuel a larger-than-expected increase in consumer spending.

Now, the question is whether this strong performance--characteristic of the so-called New Economy--will continue. If it does, that changes the strategic calculus for corporations, which may conclude that the best opportunities for expansion may well be at home rather than abroad. It also suggests that troubles overseas, as long as the global financial system doesn't implode, may have less effect on corporate profits and the U.S. stock market than expected.

Even what looks like an overwhelming flood of cheap imports could turn out to be a real plus. The fundamental theorem of free trade says that except under unusual circumstances, a fall in the price of imports can only help a country. A fall in the price of cars may be bad news for U.S. auto makers, but for consumers it makes more money available to spend on such items as recreation and computers, driving up profits elsewhere in the economy.

To be sure, this belief in the long-term strength of the U.S. economy is still a minority view among both economic forecasters and corporate strategists. Most economic forecasts still call for slow growth at home and rapid growth abroad in the long run, despite the latest upheavals. Consider Standard & Poor's DRI's latest forecast, which forms the basis for many official and corporate projections. According to DRI, domestic GDP will grow at only a 2.3% rate over the next five years and personal consumption will grow at the same anemic pace. Meanwhile, real foreign consumption, despite the recent woes, is projected to rise at a sprightly 2.9%.GLOBAL BETS. Most corporate execs also remain committed to overseas expansion despite the dangers. Take Corning Inc., the world's largest maker of fiber-optic cable. Even though the Asian recession has forced down the price the company can charge for its optical fiber as much as 30% and hurt its margins, CEO Roger G. Ackerman believes that, long term, "there is tremendous growth in Asia." Gillette CEO Alfred M. Zeien also figures that emerging markets will eventually resume growing at a rate "higher than anywhere else in the world." Wal-Mart Stores Inc., meanwhile, is acquiring four stores and six undeveloped sites in Korea. "It's a good time to establish a position in the market," says J.J. Fitzsimmons, Wal-Mart's senior vice-president for finance.

They may be right. But for the past five years, it has been a mistake to bet against the U.S. economy--and it shouldn't be counted out now.By Michael J. Mandel


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