The US economy is held back by slow growth in exports amid other struggling major economies, said Russ Koesterich, chief investment strategist at BlackRock Inc. For much of the last 20 years, the US consumers have been the engine of growth, even when global economies didn’t do particularly well.
The US consumer is doing okay, but the economy is still in an environment of slow-age growth and fairly high debt levels, which is constraining consumption, as evidenced in every consumer spending report, he said.
Asked if something different could come out of the current crisis, i.e. a “new globalization,” Russ said ideally the global economy is likely to witness a rebalancing, which involves more consumption in key emerging markets like China and arguably involves more investment in several developed markets, particularly in the US and Europe.
Asked how US policymakers could raise wages and kick-start consumer spending, Russ said fixing the problem will be a difficult task. The minimum wage will affect a very small portion of population. The challenge is that the current environment is not just a function of the recession.
The real-wage for working-age men peaked in 1974 and has been downhill since. Women entering the workforce mitigated that effect for a number of years. However, savings rates declined and consumers borrowed more. So the challenge is, in a wage-constrained environment how do policymakers make households make spend more, he argued.
Asked if he’s worried about the fall in labor participation rate, Russ said it’s a concern. In the long run, the growth of the economy is just a function of two things; growth of the workforce and productivity. If workforce growth slows the way it has been, unless productivity rises, the speed-limit for the economy is going to be somewhat slower, he explained.
Asked if the industrial sector is picking up in the absence of robust consumer spending, Russ said the industrial sector is doing relatively well. Industries have increased capital expenditure while there has been some growth in consumer industrial loans. The high-yield credit segment is looking good because companies, unlike individuals, are looking very profitable and they are cash rich, which, in turn, explains the low default rate, he observed.
When asked if investors should stay long stocks after the recent volatility and slowdown, Russ answered in affirmative. US large-cap stocks are attractively priced and valuations for stocks overall look much better than valuations of bonds, particularly if investors broaden that out to include international markets, he noted.
Asked what will encourage US companies to spend their cash, Russ said companies in the US are spending their cash reserves to some extent. There has been some pickup in capital spending, but companies are not really going to spend aggressively until they see an uptick in demand, he added.
Asked how investors could start rewarding companies that actually spend their money on capital expenditures instead of dividend payouts and share buybacks, Russ said recent investor polls have shown very interesting results. Institutional investors would actually like to see more capital spending and slightly less buybacks, which shows there has been a shift in what investors are beginning to look for, he argued.
Asked if US companies are using cash to create assets overseas, Russ said capital expenditure in the US has gone up in sectors such as energy, manufacturing, fertilizer and chemicals. More investments will flow in sectors that want to take advantage of the cheap US energy and natural gas prices, he observed.
In his research report, Russ commented the European Central Bank is unlikely to initiate a full-blown quantitative-easing because of the political barriers. Asked if Europe has run out of weapons, Russ said Europe has the weapons, but the question remains if they are going to use them.
Europe can not rely completely on monetary easing to solve its problems; there needs to be structural reforms and fiscal action as well. However, the number of trans-national transactions is only going to increase, he concluded.
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