Future of the US - Part 1

After writing about China, I thought I should talk about the US this week as these two nations will collectively shape the century to come. This posting will be the first of two I will write on the US, with the second instalment coming next week.

Prior to the 19^th century, China boasted the world’s largest economy for most part of history till it was overtaken by England in early 1800s. England rose on the back of her successful Industrial Revolution which started in 1760 as well as her colonialist ambitions. By 1890, US overtook England as the world's largest economy and has since enjoyed a pre-eminent status as the world's sole surviving superpower. In 2000, China entered the WTO and the world’s manufacturing bases decidedly shifted from US, Mexico, Europe and other Asian nations to China.

Since then, the US economy continued to grow, but has done so at a slower pace in real terms than a decade earlier. Is this spelling the beginning of the end to US supremacy with the ascension of China? The US is already beleaguered by its own domestic problems and a huge budget deficit that effectively bankrupted its government. As superpowers rise and fall, will this new century’s power axis tilt and shift eastwards, relegating US to an inconsequential player on world affairs?

Despite many headwinds confronting the US today, we need to bear in mind the world does not move in a linear fashion. The natural law of yin-yang dictates the cyclic phases every society has to go through. The American society will likewise go through phases of prosperity, decline and a resumption of growth.

Fast forward a decade or two, you may once again see the US on the growth path. As the pendulum swings again, a new golden age may be awaiting Americans, and by extension for rest of the world since US will likely continue to be a net importer from the world and the world's largest economy after China.

A golden age may play out in the US because of shifts in demographics, economic and trade structures as well as advancement in technologies over coming decade or two. US greatest strengths have been innovations and freedom. These will help US stay resilient and re-invent itself as a new phase of prosperity emerge.

1.    Retiring population. One reason for the slowdown in the US in the coming decade is because 80 million baby boomers will be retiring followed by only 65 million Generation X-ers entering the workforce. Some 21% of 310 million Americans today are in retirement, and is expected to grow to 48% in 20 years’ time. More Americans in retirement mode means fewer buyers for real estate, home appliances and risky assets like equities. Instead, in the coming decade, there will be more relative demand for health care, assisted living facilities and safer assets like bonds. Slower economic growth, higher budget deficits (more resources being re-directed to support long lived senior citizens) and a weak currency are guaranteed outcomes for now and the coming decade at least. How then will a golden era emerge in the US?  

2.    US housing outlook. Retiring baby boomers are no longer purchasing additional properties. Many are looking at selling their homes as they raise cash for retirement. This supply glut will not be absorbed by enough Gen-Xers leading to a significant slowdown in construction activities in the US for the coming decade. Home prices may stabilise now but will remain low for most of the coming decade. Fast forward another decade or two, the US real-estate will look bright once again. After years of contraction in construction and as more Gen-Xers invest in properties, a scarcity in housing will result and this will set off the next real-estate and construction boom, underpinning the start of the next golden age for Americans.

3.     US wage outlook. The currently slowing US economy, together with the negative effects of globalisation, has brought down real wages in the US. Standard of living for the middle class will continue on a declining path. As US adjusts to the new structural role it will play in the new world economy, innovations in technology, life sciences, genetics, medical sciences, industrial applications, aeronautics and electronic commerce will create new growth focus and opportunities for Americans. US will continue to lead the world in innovation. To supplement natural population growth rates, US must ensure the right immigration policies are discerning enough to target and attract talented foreigners into these critical fields without depressing local wages across the board. As US continues to lead the world in expanding these strategic, value-added industries, it will continue to expand the global economic pie and its own share of this prosperity. As the baby boomers eventually exit the workforce, there will be labour shortages in the US that will once again lead to wage hikes and growing opportunities for the working Americans. The standard of living for the middle class will then reverse a two decade decline. 

4.      Return of the US consumers.  Today, private consumption accounts for about 80 percent of US GDP. A slowdown in real wages will mean a weakening in spending power. But with a weak housing market and little interests to invest in large big-ticket purchases such as houses or cars, Americans borrow less and they end up with more disposable income. I believe this explains why retail sector is currently booming despite talk about the death of the US consumers. Consumers end up splurging more on smaller-ticket purchases like smartphones, jewellery and accessories. In a decade’s time, higher consumer consumption will spread to all sectors as housing market recovers and Americans also start to trade their old automobiles for more fuel efficient cars. The US economy will grow at a more robust 4% like it did in the 1990s.

Stay tuned next week, as there are more reasons to believe how the world will change in the coming decade or two that will underpin America’s economic might ushering in her next golden era.