Sometime this year, you may have the
opportunity to experience an event that’s even more rare than a lunar or solar
eclipse – an economic eclipse. The United States has had the world’s largest
economy since we surpassed Britain back in 1872, but our economy is about to be
overshadowed by China’s.
A lot of folks were anticipating an
economic eclipse sometime around the end of this decade. As it turns out, the
event horizon may be much, much shorter. Last week, The World Bank released its International Comparison Program (ICP)
report. Every six years, in an effort to measure the real size of the world
economy, the ICP surveys countries and measures their relative economic might.
The ICP report was the final analysis of data collected during 2011. It found, at
that time, the U.S. had the world’s biggest economy. It also established that
China’s economy had grown much faster than ours between 2005 and 2011. China’s
economic growth has continued to exceed that of the United States. As a result,
China’s economy is expected to eclipse that of the United States during 2014.
The U.S. economy will be the second largest and behind us will be India. The
ICP also noted that:
·
The
six largest middle-income economies (China, India, Russia, Brazil, Indonesia,
and Mexico) account for 32.3 percent of world Gross Domestic Product (GDP)
·
The
six largest high-income economies (United States, Japan, Germany, France,
United Kingdom, and Italy) account for 32.9 percent of world GDP
·
Asia
and the Pacific, including China and India, account for 30 percent of world GDP
·
The
European Union and countries in the Organization for Economic Cooperation and
Development (OECD) account for 54 percent of world GDP
·
Latin
America comprises 5.5 percent of world GDP (excluding Mexico, which is an OECD
country, and Argentina which did not participate in the ICP survey)
Some people are unsettled by the news.
Among them, apparently, are members of China’s National Bureau of Statistics
(NBS). According to The Washington Post,
the NBS expressed reservations about the study’s methodology and did not
endorse the results as official statistics. As with solar and lunar eclipses,
the event may be notable, but its effects are unclear.
So, you’ve heard U.S. companies are fabulously
profitable and sitting on record piles of cash. It’s true. According to Moody’s Investors Service, non-financial
U.S. companies had hoards of cash at the end of 2013 – about $1.64 trillion.
That’s about 12 percent more than the previous year’s record-setting $1.46
trillion. Technology, healthcare/ pharmaceutical, consumer product, and energy
companies held the most cash.
Why are profits at U.S. companies so high? The Economist offered several possible explanations:
1) Corporate executives favored capital and not labor in recent
years. An expert cited by The Economist
suggested, “…Had pay kept pace with productivity in recent years, profit
margins would be around their historic average, not close to a 50-year high;”
2) When the U.S. dollar loses value, which it has, the foreign earnings of
American companies get a lift; and 3) Firms have limited their capital
expenditures on equipment, software, and other items. As a result, depreciation
charges have fallen making companies look more profitable.
Why aren’t companies spending? It has a lot to do with overseas
profits and tax rates, according to The
Wall Street Journal’s MoneyBeat. It reported, “Growth in the cash
stockpiles, however, came largely from operations overseas. Instead of bringing
that money back to the U.S. and paying taxes as high as 35% upon repatriation,
companies borrowed money in the U.S. bond market, where interest rates were
historically low. The report calls that strategy ‘a form of synthetic cash
repatriation.’”
The stark reality is companies are profitable, but they’re also
sporting a lot of debt. During the past three years, corporate debt has risen
by $3.67 for every $1 of cash growth, according to a report from Standard & Poor’s Rating Services
which was cited by The Wall Street
Journal. That’s okay when interest rates are low, but may not prove to be
so great when interest rates in the United States move higher.
Weekly Focus – Think About It
“I never
considered a difference of opinion in politics, in religion, in philosophy, as
cause for withdrawing from a friend.
--Thomas Jefferson,
American President
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