THE U.S. WILL CONTINUE TO LOSE MARKET SHARE / THE FINANCIAL TIMES MARKETS INSIGHT ( HIGHLY RECOMMENDED READING )

The US will continue to lose market share

By Byron R. Wien

Published: February 16 2010 13:03

The debate about the current recovery centres on whether a secular change is taking place in the United States economy. If it is not, then we should all be optimistic because peak-to-trough declines in real GDP of 4 per cent are usually followed by gains of 6-8 per cent. But the consensus view is that growth will be sluggish (2-3 per cent) and few jobs will be created.

There will be revenue growth to be sure. The weak dollar has clearly helped exports and the 90 per cent of the working population with jobs are spending again, now that their house prices have stabilised and the stock market has come back from its lows of last March. The unemployment rate remains stubbornly near 10 per cent, however, and operating rates for American manufacturers are at 70 per cent, so there isn’t much of an incentive for capital spending beyond technology.

Moreover, the working week is staying around 33 hours, so even those who are working aren’t getting their pre-recession paychecks. To get the goods out the door and provide the services demanded by customers, companies are hiring temporary workers in record numbers to maintain maximum flexibility. They are worried that a health care bill, if one passes, will add onerously to the cost of full-time employees and they don’t want to be hit with more termination pay if the economy suffers a double-dip.

The result of this is that productivity is soaring. The reading of better than 8 per cent growth is the highest in decades. Rather than applaud the efficiency of the American worker one should wonder if the numbers are too good. Are workers being driven to the point of exhaustion? There’s no sign that anyone’s complaining. Wage rates are barely increasing. Most of us with jobs are glad to have them and aren’t willing to make any waves.

How much longer can this go on? Not much longer in my opinion. The unemployment rate usually starts moving lower about nine months after the economy troughs and that happened in the second quarter of 2009, so we could see jobs created as soon as the February report, which will come out on March 5. I also believe real GDP will be stronger than the consensus expects, as inventories continue to be built and the remaining part of the government’s stimulus programme flows through the economy.

Longer term I doubt that the United States or Europe will grow faster than 3 per cent anytime in the next five years, while the developing world will grow in excess of 5 per cent. The result of this is that the mature industrial economies are losing about a percentage point a year in share of world GDP to the emerging markets and they are losing a similar amount in share of world stock market capitalisation.

The biggest problem the United States is facing is the productivity of capital. After the end of the second world war it took less than two dollars of investment by government, corporations and individuals to produce one dollar of GDP growth. The productivity of capital continued to be impressive until 1980, when Europe had recovered and Japan was producing automobiles and consumer electronics products that found wide acceptance in world markets. In the single decade of the 1980s, the productivity of capital declined from less than two dollars of investment to produce a dollar of growth to about three. If you assign a 30 per cent gross margin to that revenue growth, the return on investment declined from 15 per cent to 10 per cent.

That level of return proved to be satisfactory, but in the first decade of this century capital productivity declined seriously in the United States. Because of profligate spending on over-priced housing and other assets that declined seriously and deficit spending by the government, by the end of the decade it took six dollars of capital to produce a dollar of growth. The return on that would only be 5 per cent and few would put money at risk for that reward.

When you look abroad to assess our competitive position, the results are not encouraging. It is hard to put together comparable information, but, based on the data I could gather, Europe was still getting a dollar of growth for two dollars of investment and China was getting at least a dollar of growth for each dollar of investment.

If the US is to stop losing ground against other mature and developing economies, it is going to have to put money to work more effectively. We are still the leaders in technology and scientific research and we must continue to take advantage of the commercial possibilities of innovation. If we don’t reverse the current trends, growth in America beyond this year will be disappointing and our standard of living will decline.

Byron R. Wien is senior managing director at Blackstone Advisory Partners

Copyright The Financial Times Limited 2010.