Don't Count America Out
Jul 26th 2012 10:22AM
Updated Jul 26th 2012 10:26AM
The storyline around America has taken a sudden, and to many, unexpected turn in the past couple months. Just two weeks ago, The Economist featured a cover with a shirtless Uncle Sam flexing with the words "Comeback Kid" above the muscle-bound American icon. This wasn't your father's Uncle Sam poster. This Uncle Sam had red, white, and blue pasties on its nipples. The new America seems to have an edge.
The message behind that Economist cover? America has managed to come out of the recession with a leaner, more powerful economy, and is quietly becoming an energy superpower on par with Saudi Arabia thanks to recent advancements in finding new oil and gas. Along with a revitalized energy future, America has begun paying down its debts, closing its trade gap, and was the first to clean up its banking system.
Doom and gloom is gone, and in its place is a surprisingly positive view of America's future, pasties and all.
For Americans who've seen continually high unemployment and essentially flat real GDP growth over the past five years, such a notion of American greatness could seem foreign. In the minds of investors who are pricing the S&P 500 (INDEX: ^GSPC) at its lowest P/E since the middle of the '90s and are pricing many Dow Jones (INDEX: ^DJI) stalwarts themselves near single-digit P/Es, "greatness" doesn't seem to be the word they're associating with the country's future.
Hope on the horizon
Yet, The Economist is hardly alone in beginning to ponder the weight of America's dawning economic transformation. When discussing America's future with Fool writer Morgan Housel last month, who's one of the sharper macro writers around, he described America's sudden rise as an energy giant as an enormous shift which is just starting to get press coverage in line with its importance.
The May/June issue of the magazine The American Interest featured its own cover story proclaiming America "The Comeback Kid." The essay, written by economist Tyler Cowen, had arguments similar to those in The Economist, saying that America would once again become an export powerhouse. He listed not only increased energy exports, but also leadership in artificial intelligence and next-generation manufacturing as key reasons for our rise.
In addition, Cowen pointed out that as poorer countries first develop, they crave raw resources to build infrastructure like copper. America doesn't specialize in these resources and has missed out on a big part of the emerging market export bonanza thus far. However, as these countries get wealthier and begin to import more high-end services and goods like pharmaceuticals, entertainment, and advanced technologies, they'll shift their demand to America.
The makings of a 21st century powerhouse?
On that last point I'm the most hopeful. No industry shows America's promise across the 21st century like technology. It's an industry which harnesses the best traits of America: the drive for innovation and entrepreneurialism. It's an industry all Americans can truly be proud of.
We've already seen the impact of how emerging countries' changing tastes are boosting American companies like Intel (NAS: INTC) , which routinely credits growth in countries like China, Brazil, and Turkey for its sales growth.
To truly grasp America's dominance of the technology space, one only needs to look at a list of the largest tech companies in the world. Nine of the ten largest are American. The first European company doesn't show up until No. 11 on the list.
|1||Apple (NAS: AAPL)||USA||$565 billion|
|2||Microsoft (NAS: MSFT)||USA||$252 billion|
|3||International Business Machines||USA||$219 billion|
|6||Samsung||South Korea||$136 billion|
Source: S&P Capital IQ. Market caps are reflective of July 20 closing prices. Sorted by companies in the information technology sector.
Other sectors set to see exports soar in coming decades aren't quite as American-dominated as technology, but they have a much stronger American presence than areas like copper and iron ore exports that drove worldwide export growth in the last decade. A shift to new exports and demand for technologies higher up on the "value chain" speaks well to America's future.
Why all the sudden media interest in the potential of American greatness? Or, more specifically, what has changed in America that wasn't present during its sub-par growth years between 2007 and today?
A large part of the storyline is the reforms America enacted earlier than other nations across the globe. The country recapitalized its banking system aggressively in 2008 and 2009 and started chipping away at the amount of credit outstanding in the country.
In contrast to America's banks and consumers cutting credit and tightening their belts, China moved full-steam ahead, seeing credit as a percent of GDP move from less than 125% in 2008 to north of 175% today. China is now balancing cutting its reliance on increasingly misallocated investments with keeping its economy chugging ahead at high levels. Throughout much of Europe, the banking system is still a mess, and deeper structural reforms to backstop banks across countries like Spain have been necessary lately. Even with the recent progress, Europe still has a long way to go before there's faith not only in its banks, but in the continent's nations themselves.
Another explanation might just be timing and advancements that were impossible to predict. Five years ago, few foresaw the enormous impact new unconventional energy techniques like fracking would have on America's future. Now, the effects of these techniques are apparent: the price of natural gas in America is less than a third of the price in Asia and far below Europe. It's hard to ignore that kind of change for long.
Reforms, trends, and timing are all tipping in America's favor.
Can America rise alone?
However, an important aspect of the storyline surrounding America's future prosperity is the lack of other bright spots across the globe. Emerging powers India and China are seeing their lowest growth rates in a decade, while Europe is stumbling through crises in several countries.
Talk of an American economic revival accompanies scrutiny of the Chinese economy and its ability to maintain huge growth rates. It's easy to see why this would be popular counter-programming; as America slogged through the last five difficult years, stories of the "inevitability" of China's rise to become the world's next economic superpower grew in volume. The 2010 midterm election season included a commercial where a Chinese classroom in 2030 laughed at the demise of the United States.
While these stories often play on Americans' insecurities of losing their position as top dog, it's important to remember a healthy America relies upon a healthy global economy. Those next-generation exports require growing economies across the world. Many unconventional energy plays aren't economical unless demand for resources continues in emerging markets.
Furthermore, under a scenario of an America reborn as an export powerhouse through energy and new technologies, its trade imbalance with China would largely close. The popular convention today of China "owning" America would fade and become a curious afterthought of a generation past. Such a scenario isn't too much of a stretch; back in the 1980s it was believed Japan would soon own the U.S. itself. Today, we see how the conventional wisdom of the past played out.
A better tomorrow
The pieces for a better America seem to be in place. That's not to say there aren't sufficient reasons to be worried about the country's future. For one, much of the conditions for a stronger American economy rely on the economy of other countries to stay on track. Second, with situations like the impending fiscal cliff coming at the end of the year, America has the chance for inflicting more wounds on itself like we saw in last year's debt stand-off and resulting credit downgrade.
With five years of doom-and-gloom headlines behind us, sometimes it's important to remember how resilient the economy can be. It's important to remember that recessions give us a chance to reform broken systems and clean out waste. It's important to remember that America has been through worse, and that great economic revivals can come at times of despair, when no one saw it coming.
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The article Don't Count America Out originally appeared on Fool.com.Eric Bleeker owns shares of Cisco. The Motley Fool owns shares of Apple, Oracle, Cisco Systems, International Business Machines, Microsoft, Qualcomm, Google, and Intel. Motley Fool newsletter services have recommended buying shares of Microsoft, Visa, Google, Intel, and Apple. Motley Fool newsletter services have recommended creating a bull call spread position in Microsoft, a bull call spread position in Apple, and a synthetic long position in International Business Machines. The Motley Fool has a disclosure policy.
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