Where is Our Economy Headed? Anirban Basu Explains

Posted in: PSA Partnership

What makes South Sudan the fastest-growing economy in the world? It must be that it’s a “fabulous vacation destination for the kids,” said Baltimore-based economist Anirban Basu, tongue-in-cheek, during a galvanizing talk as part of the PSA Partnership Program. What makes Brazil another top contender, given that Brazilians are “rarely at work and never fully clothed”? Do the suit wearing, office dwelling Americans have it wrong?

Such is the shifting landscape of the modern-day global economy, Basu explained in a presentation of dense charts and data sets doused with just the right dose of humor to keep the morning audience both engaged and entertained. Developing nations are surging, while advanced nations sputter, and what used to keep a country afloat may now sink it. What do these changes mean for the U.S. economy in the year ahead? And what can we expect closer to home, in Maryland?

To answer these questions, Basu, who is chairman and CEO of the Baltimore-based Sage Policy Group, examined the full range of variables at play and drilled deep in the data of the world, national, and regional economies. His analysis? The U.S. economy has improved, but there are reasons to believe the gains are less concrete and sustainable than expected.

“Now we are in 2014,” Basu said, “and we seem to be, according to some data, coming out of the 2007-08 recession, with people getting busier, and revenues starting to rise.” The labor market is improving. The housing market is improving. And the stock market is booming.

All good news, but we’re not out of the woods, Basu warned. Here, a look at some of the economic trends he sees happening.

Raw materials drive economic growth

What happens globally always influences what happens locally. In 2013, the global economy grew at a rate of 3 percent, just below the average growth rate of 3.6 percent. It wasn’t a great year, but it wasn’t terrible, Basu said, with notable variations among countries and continents, largely due to raw materials production.

Africa, for instance, which produces some of the highest rates of copper, iron ore, bauxite, and other raw materials, is the fastest growing continent, while Europe, which is not a major producer of metals and has limited deposits of oil and natural gas, is the slowest. This pattern holds true on U.S. turf, too, where top economic performers are states like Alaska, Texas, Oklahoma, North Dakota, California, and New Mexico — all major oil and gas producers, and all west of the Mississippi.

What does this mean for states like Maryland, where, as Basu said, “energy production is not a hallmark”? Maryland has held its own in recent years. It ranked 22nd among all U.S. states in economic growth in 2013, thanks in part to the high number of federal employees in the region. “Take away the federal government, and Maryland might not be doing so well,” he reasoned. “If the government curbs spending going forward, we might expect Maryland to fall behind and the economy to underperform since we’re not on the energy train.”

Debt rises, but stocks stay strong

Yes, the accumulated debt in the United States keeps rising (and is currently around $17 trillion), and our debt-to-GDP ratio is one of the worst in the world. Yet 2013 was a raging bull market, and already in 2014, the Standard & Poor’s 500 Index (S&P 500) has hit record highs.

Why the paradox, and what’s driving the U.S. stock market? Basu says, in large part, it’s the federal government, which continues to benefit from record-low interest rates and pumps money into the national economy, despite the record-high debt level. This, in turn, builds confidence among consumers and investors, which shows up in the stock market.

“Someday, the markets may respond [and reflect the record-high debt],” Basu said, “but they haven’t yet.” In fact, data from the last few years reveals that a strong correlation between S&P 500 performance and the amount of money pumped in to the economy by the feds. “The stock market loves the government staying engaged,” Basu explained. Only time will tell how responsive the market will be to the fed’s plan to continue tapering their bond-buying program.

Personal consumption fuels growth

Though government spending keeps the markets strong, it’s not the main driver of U.S. economic growth in 2013, or the projected growth for 2014. “The real driver is personal consumption,” Basu said.

Though consumer confidence remains somewhat rocky, “Americans work out their nervousness at the mall,” he explained. “We still love to consume, we love a bargain, we love our outlet centers, we love our Nordstrom Rack.” But we can’t view this kind of spending as a sign of real, long-term growth.

More part-time jobs, fewer full-time

Many economists attribute the disappointing job numbers of the last two months to winter ice and snow storms, but Basu expects it to continue: “The largest number of jobs added (656,000) are in professional and business services, but many of these jobs are temporary or part-time,” a trend that mirrors the growing ranks of part-time workers — and decline of full-time workers — nationwide since the recession began in 2007. Why?

Basu blames the Affordable Care Act, which causes businesses to adopt the mindset of, “the more people I have on my staff who work 30-plus hours a week, the more this is going to cost me,” he says. The result is that many companies (Target, Home Depot, Walmart, Trader Joe’s, to name a few) are switching to a part-time model to control healthcare costs.

Heed the tailwinds

The economy did, in fact, gain momentum last year, and Congress did, finally, pass a budget, an outcome that brings greater certainty regarding the federal budget and monetary policy in the year ahead. “At least we know the numbers now,” Basu said.

Can we make the claim, then, that these outcomes and trends (the booming stock market, lower gasoline prices, improving housing market, uptick in the labor market) are signs of sustainable momentum? Are we really moving beyond the fallout of the Great Recession? Basu views these signs as positive, but not permanent. “They’re like tailwinds,” he said, which can change direction on a dime.

Need help growing and protecting your assets during a time of economic uncertainty? PSA can help. Contact us to start the conversation. Also stay tuned for our next PSA Partnership Program talk, “17 Startup Hacks Ripe for the Mainstream,” by Chris Mechanic, co-founder of Webmechanix, on Tues., March 25.