Country Checklist: United States

Country Checklist: The United States

 

Government

Is the style of government conducive to business?

To state the obvious, the United States is a developed market. The Governemnt is a federal republic, meaning that a group of states work together, through elected officials, to make decisions deemed to be in the best interest of the people who put them in office. The government is in place to protect personal freedoms and is know throughout the world to be a, if not the, premier territory to do business. As a mixed economy, the States are market based with public oversight and a number of public goods.

What is the level of corruption?

With ratings from 10 to 90, the Corruption Perceptions Index gives the United States a mark of 74. This places them near the top of the list, yet trailing some of the G-10 countries.

What is the level of freedom?

According to the Cato Institute Human Freedom Index, the US again places near the top but follows other countries thought of in a less positive light. The same can be said for the Heritage Index of Economic Freedom, which measures freedom using a slightly different method.

 

Economics

What is the level of GDP?

$19,500,000,000,000.

$19.5 Trillion.

One quarter of the output of goods and services in done within the borders of The United States of America. It is the largest economy in the world and some say the strongest as it acts as a backbone to it’s trading and economic partners.

What is the direction of GDP?

From one year ago, GDP in the third quarter of 2017 grew at a rate of over 3%. This is not growth off a low base, which portends to the idea that it is a meaningful move upward.

What does the current account look like?

The US runs a current account deficit equaling -2.4% of GDP. At a deficit, the country imports more than it exports. How could one afford to roll this over year after year? In the case of The United States, if not all deficit dwellers, it must export capital.  With this capital in hand, the country who has exported the goods or services to the States has the opportunity to invest those dollars in US assets. This seems bullish on the surface, but carries long-term implications that any net debtor must face in time.

What is the quality of it’s trading partners?

In aggregate, the European Union is the largest trading partner with the US. This is welcome news as the two are relatively like-minded in other affairs. China is the largest single country trading partner followed by the geographically-linked Canada and Mexico. Next, and with a large drop in aggregate trade comes Japan.

How diverse is the list of trading partners?

The trading partners run the gamut of diversity in measure of geography, economy and social prosperity.

What is the diversification of it’s industries?

Private spending takes up about nine tenths of total GDP while the public sector is responsible for the remainder. According to The Bureau of Economic Analysis, Finance, Insurance, and Real Estate make up about one fifth of the output of GDP, with manufacturing a fraction of a point in the dust.  At 12% comes professional and business services followed by the aforementioned public spending.

 

Monetary Policy

Is the currency stable?

The US Dollar is the reserve currency of the world. This may be why the country is allowed to run a current account deficit over time- it must supply the world with dollars as it is demanded. While monetary policy around the globe has be, how should we say it, inventive, the Fed has yet to be the wildest bank of the bunch, lending to a relatively stable system stateside.

What does the yield curve look like?

The 10 year bond minus the two year note, although some are contending it is due to supply and demand imbalances, is a telltale sign of an economy’s future health. If banks get paid for lending long and their cost of doing business is paying the short end, a steeper yield curve is better for business. We know that what is good for lending tends to be good for economic growth, in general terms.

At half of one percent, the yield curve is not looking promising. Most point out that only when the yield curve has inverted is there a problem, floating around near zero is nonetheless gloomy for prospects of credit expansion.

What is the state of Monetary Policy?

Interest rates are low. The Federal Reserve has a balance sheet in excess of four trillion dollars. Unemployment is near record low readings. The stock market is at all time highs. Money is easy.

What is the likely direction of Monetary Policy?

While the Fed is raising short term interest rates, they are still, in an absolute fashion, low. While the Fed is still easy, it is certainly moving toward slowing down. Reinvestment now has a cap so the pace is telegraphed and the market should have time to adjust.

 

Fiscal Policy

Is the tax rate competitive?

The new tax plan has seemingly done it’s job to move rates into competitive territory.

 

What is the debt level, as compared to GDP?

According to The St. Louis Federal Reserve Banks, Public Debt to GDP is hovering around 100%. A more telling metric would be the cost to service the debt, as compared to GDP.

fredgraph (16).png

At 1.3%, this seems bearable. What will be more difficult is refinancing when the current debt comes due. If rates are materially higher and the debt must be turned over, this could create problems.

What is the general state of fiscal policy?

Fiscal policy involves taxation and spending. The US Government is lowering taxes and increasing spending. This is expansive- an unusual move for Republicans.

What is the likely direction of fiscal policy?

The fiscal deficit is set to expand which bodes well for the certain industries that will receive government subsidies and contracts. This is indicative of fiscal stimulus and expansion- generally a good sign for investors.

 

Demographics

What is the rate of Unemployment?

fredgraph (17)

Unemployment is at post-crisis lows. At 4.1% it may be steadily reaching it’s cyclical bottom. I say cyclical because as the rate creeps off of the basement levels up closer to the natural rate of unemployment (seen below), recessionary winds tend to begin blowing.

fredgraph (18)

 

One last point on unemployment: those who are underemployed (a rocket scientist working as a barista) is falling as well.

fredgraph (21).png

 

What is the labor-force participation rate?

fredgraph (20)

For working-age citizens, the labor force participation rate has started to tick back up since it’s 2015 lows. At 82%, an on an upward trajectory,  this is a positive signal that wages should rise.

What is the level of education?

According to the United Nations Education Index, The US ranks near the top, trailing only New Zealand, Australia, Norway and Netherlands. This is basically a test for how many years a citizen is expected to be enrolled in schooling in developed countries.

What is the trend in population growth?

As the third most populous country, far behind China and India, the US poulation growth has been falling for decades. When in 1960 the population grew at a rate of 1.7%, we rise at a rate closer to 0.7%. While this trend is true of he world as a whole, it has not been as dramatic to the negative side, in aggregate, elsewhere.

 

Selected Risks

What is the risk of war?

The risk of war seems remote despite tweets being exchanged about who has the bigger nuclear button, President Trump or Jim Jong Un. While it is certainly a possibility, it is hard to forecast.

What is the risk of a currency war?

After branding China a “currency manipulator”, President Trump backed off those comments as, I assume, he realized that the PBOC may have some weight to throw around as retaliation, being a large holder of treasuries. While the US is still the reserve currency of the world, a currency war seems remote as well, but even rumors of China laying off the bid for treasuries shook markets yesterday.  Again, the possibility remains.

What is the risk of a trade war?

Here is the real risk of the three. Rumors leaked yesterday about The US possibly backing out of NAFTA negotiations fully and putting its emphasis on the “America First” plan. As a citizen of the US, I hope they know what they are doing, but it seems as though this opens the door for another country to take our place. A trade war seems the most likely of the three.

 

Overall

While this is the first analysis of the series, and there is nothing to compare this to, the US rates well. Using a similar system as the equity checklist the US achieves a score of 76.25.

US Score.png

 

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