Older Americans and federal stimulus dollars are playing a big role in the slow U.S. economic recovery, but young Americans are going to have to get much more involved before the pickup can gain real momentum.
But even if that happens, the United States will have to compete in a global economy where other countries are moving ahead on their own strength, increasingly, economists said on Thursday at the Financial Planning Association of New York’s Annual Spring Forum.
“The labor force participation among young people is at the lowest level since 1963,” said John Hermann, a senior fixed-income strategist for State Street Global, referring to the recovery in the U.S. “We’ve got to get them out of Starbucks, off of Facebook and into the labor force.”
Hermann spoke Thursday during an early morning panel. Jim O’Sullivan, chief economist at MF Global, and Joseph Zidle, head of research at Bank of America Merrill Lynch also spoke during the sometimes-animated session.
Hermann noted that job growth among Americans 55 years and older has not dipped a single month since the onset of the recession. The percentage rate of unemployment among young people, however, is in the high teens.
“We’ve been a country where consumption has gone up to 70% of GDP,” Hermann said. “We need austerity measures to push that back down to 60% of GDP.” To do that, Hermann said, the U.S. must to lead in technology development and exports. Banks need to shift back to lending for industrial uses. It is still uncertain whether U.S. workers—young and mature—banks, manufacturers and others have the steam to pull it off. American banks, insurance companies and other industries have benefited from more than $2 trillion in federal stimulus money since 2008.
“If we pull away that support … the speed of the economic recovery will be called into question,” Hermann said. “We don’t know what our inherent strength will be.”
Even so, Hermann, Zidle and O’Sullivan pointed out reasons to believe in a continued recovery. Risk aversion is fading, and American companies are beginning to invest and hire workers, which led to a boost in employment and a dip in unemployment claims, O’Sullivan said. Further, payroll growth is being undercounted.
“We are at the point where the headwinds are fading,” O’Sullivan said. “The wave of evidence is that the economy is improving.”
Zidle says he sees two pictures emerging from the global recovery. American companies are earning more revenues, booking more profits and hiring more workers—overseas. Noting consumption and luxury retail sales, Zidle said on average, Americans have 4.25 credit cards apiece. In China, the average is 0.25 credit cards. “There is a powerful global consumer at the start of the credit cycle,” he said.
Zidle added that 36% of companies in the S&P 500 earned revenues outside of the U.S., and turned a profit from 46% of those proceeds.
In response to these numbers, investors are buying stocks in companies from emerging-market and developed countries. They are also putting money into bonds issued from Australia, Korea, and Mexico. Hermann said he recalled a conversation with a fixed-income investor, who said U.S. Treasuries would have to start yielding 7% to make them more competitive with comparable sovereign debt.
During the keynote address, David Wyss, chief economist and a managing director at Standard & Poor’s, said one reason Americans are gripped in such fear about the economy is that they believe the problems are universal. In fact, much of the trouble is concentrated in the Rust Belt and the Sun Belt. Detroit, for instance, is suffering from high unemployment and a dwindling population. Indeed, the residential vacancy rate is about 40% in that city, and the media price of a home recently hit $20,000.
“For that money, you could buy five condos in New York,” Wyss said. “I don’t know how this will get fixed, except a lot of those homes will get bulldozed.”
Wyss acknowledged the competitive challenges facing the U.S., noting that China and India completely escaped the recession. Notwithstanding China’s GDP slowdown, its efficient stimulus program will leave it with a much better internal road system and arguably the best rail system in the world. All of that will cost the country about 3% of its GDP.
But even the United State has gotten out of the woods, and has one metric in common with its Chinese counterpart, according to Wyss. Ultimately, the economic stimulus will probably cost $330 billion, amounting to 2.5% of GDP.