Peter Nulty

Is there opportunity in the U.S. economy? (excerpt)

On the Trading DeskSM5-15-13
By Peter Nulty

“Positive economic growth in the U.S. is likely to continue,” says Dr. Brian Jacobsen, CFA, CFP®, chief portfolio strategist with Wells Fargo Funds Management, LLC. But not all agree. Find out why in this excerpt of On the Trading DeskSM from Friday, May 10, 2013.

Listen to the full interview.

You think there is positive economic growth for the U.S., but not everyone may agree. What are the concerns?
Some of the biggest concerns that I hear from people are not necessarily related to the short-term outlook for the U.S. economy. It's more about the long-term outlook, and I categorize these as the dreaded Ds—debt, demographics, and decline. I think what’s on a lot of people's minds are several things: We have too much debt; our population is aging too rapidly; and perhaps we're on the decline, especially from a technological standpoint, where perhaps we have reached some sort of peak or pinnacle when it comes to innovation.

Well, let's take a look at each of these dreaded Ds. First, debt. There is certainly a lot of it. What have you to say to those who are concerned that debt could affect the U.S. economic growth story?
If you look at the United States right now, the total public debt outstanding as of May 8 was $16.784 trillion. Compare that to the U.S. gross domestic product (GDP), which is one measure of a nation's ability to pay for that debt, that's about $16 trillion. Now, we have more debt than we do GDP, and people point to that as a problem. And it can be a problem, if that persists indefinitely. It's important to remember Stein's Law—Stein was on the Council of Economic Advisors under Richard Nixon and Gerald Ford. Stein's Law simply says that what cannot continue won't. And, to an extent, I think that these trillion-dollar deficits that we've seen in the past, we're seeing those shrink a little bit. There's a lot of public attention saying that we have to do something about this deficit problem. Thankfully, we're having that conversation now as opposed to waiting say 15 years from now. If we weren't having the conversation today, then I would probably be worried.

Now a related concern over the future and the burden of Social Security and Medicare is the fear of demographics. Aren't investors justified in thinking that as Boomers retire and start to tap those benefits it will have a draining effect on the economy?
It can, but I'm not that concerned about Social Security so much as I am about Medicare, because Medicare is a big unknown in terms of what's going to happen to the pace of cost increases for health benefits. With Social Security, it's a little more predictable, and according to the actuaries for the Social Security Administration, it could actually be a very solvent system if we were to make some fairly simple or small changes to it. For example: increasing the retirement age at which people get full benefits, changing the way in which the benefits are indexed to inflation, perhaps taxing some of the benefits, or even perhaps increasing taxes on individuals who are currently paying into the system by a fairly modest amount. And it's also important to recognize that, with the Baby Boomers retiring, we also have a lot of Millenials. The Millenials are actually as large, if not a larger, group as Baby Boomers. So I'm actually somewhat optimistic about Social Security. I think it could actually be sustainable thanks to the changing demographics and the opportunities that they're presenting for society.

That's fascinating. Now, you also mentioned fear of decline. What's that about?
One of the common refrains that I hear from people is that we have somehow reached the pinnacle of innovation, that all of the low-hanging fruit of innovation has already been picked. And to some of the doomsayers who say that the United States is on the decline, I like to point back to two distinct episodes. One was back in the late 1800s. Thomas Malthus was an economist who noticed that population was growing more rapidly than agricultural output. He said that, "Well, if this continues, we're all going to starve to death." And to an extent, he was right, if that continued. The thing is, it didn't continue because what he failed to see was really some of the innovations that took place that improved crop yields. And we have a much better lifestyle now than what we did back then. Then the second episode that I like to point to is back in the early 1900s. There was legislation being proposed in the United States that shut down the Patent and Trademark Office because the argument was all the best innovations are all behind us. Well, I think that it's safe to say that over a hundred years later there are quite a few improvements that took place since they proposed to shut down the Patent and Trademark Office.

Even with all that, many investors might point out, and a lot of people do, that the economy is just plodding along. Is there some proof that indicates the U.S. economy is getting better than it was say back in 2008?
Financial conditions are a lot better right now. The housing market is continuing to improve. The unemployment rate has come down. So we could be plodding along, but long term, we could actually be on a slightly higher growth rate than what we were over the past 10 years. Now, where were we in 2008? The global economy in 2008, as measured by world gross domestic product, shrank by 0.6%. For 2013, according to the International Monetary Fund, they're forecasting that the global economy is going to grow by over 3.5%. So that's major, going from shrinking by 0.6% to growing or expanding by 3.6%.

That's really encouraging. Now, we only have a moment remaining. How does everything we discussed create opportunity for investors?
For investors, I think it means look out toward the long term. When we get out to 2014 and 2015 and the financial crisis becomes more and more of a distant memory, I think that we can actually expect to have higher economic growth, perhaps surpassing 3.5% for a few years after that as innovations begin to come into the economy and become more widely used and we begin to see the improvement in our living standards as a result of their uses.

Well, that's a great note to close on. Brian, thanks for joining us this week.
Thanks for having me.

The views expressed are as of 5-15-13 and are those of Peter Nulty, Chief Portfolio Strategist Brian Jacobsen, and Wells Fargo Funds Management, LLC. The information and statistics in this report have been obtained from sources we believe to be reliable but are not guaranteed by us to be accurate or complete. Any and all earnings, projections, and estimates assume certain conditions and industry developments, which are subject to change. The opinions stated are those of the author and are not intended to be used as investment advice. The views and any forward-looking statements are subject to change at any time in response to changing circumstances in the market and are not intended to predict or guarantee the future performance of any individual security, market sector or the markets generally, or any mutual fund. Wells Fargo Funds Management, LLC, disclaims any obligation to publicly update or revise any views expressed or forward-looking statements.


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