How the U.S. Economy Stacks Up

Though mired in the worst recession in decades, the U.S. remains the world's preeminent economy.

By the staff of The Kiplinger Letter

December 29, 2008

For proof of the U.S.' economic prowess, look no further than what's happening these days to U.S. Treasury bills. In the face of global recession, investors worldwide are flocking to that safe haven, pushing yields to zero in recent weeks. Why? Because, despite the current contraction, confidence in the U.S. economy is greater than almost anywhere else in the world, and investors feel assured that the U.S. government will pay off its obligations.

Foreign direct investment flows also point to the U.S. economy's vibrancy: Last year, foreign investors sank $233 billion into business ventures in the U.S. -- far eclipsing any other economy, including China and Hong Kong combined.

At nearly $14 trillion, the U.S. economy dwarfs every other. It's three times as large as the economy of Japan, which ranks second. GDPs for China, ranked third, and Germany, in fourth place, each run in the neighborhood of $3.5 trillion a year.

And it's tops not just overall, but in both services and industrial output. In 2005, U.S. manufacturing output topped $1.7 trillion. In comparison, Japan cranked out $950 billion in manufactured goods and China, about $780 billion. Since then, the U.S. has doubtless lost some of its edge, but it still solidly leads. Particularly strong competitors include health care and communications equipment, pharmaceuticals, aerospace, oil and gas equipment and industrial machinery. Sure, U.S. output will shrink in the recession, but so will everyone else's. And it's not likely to cede the number one position for many years yet.

Services have long been one of the U.S.' economic strengths, and the nation is by far the world's largest provider of them, churning out about $6 trillion worth this year. It's also the number one exporter, with 14% of world trade in services, which run the gamut from architecture and banking to transportation and tourism. But other countries are beginning to nibble at the U.S. market share. In the wake of this year's credit meltdown, U.S. financial firms' competitive advantage is eroding. Local institutions are becoming more sophisticated, while global megafirms, many of them U.S. based, have less allure. At the same time, a sizable cadre of skilled workers in India, the Philippines and elsewhere are siphoning off many jobs ranging from the reading of medical images to engineering and accounting.

One reason for U.S. economic preeminence: strong productivity. Since 1995, American industrial output per hour of labor has grown faster than in most industrial countries, averaging a healthy 2% increase a year. Among G-8 nations, only the United Kingdom has outpaced the U.S. since 2000, with Japan notching growth just below America's pace and others significantly lower. The recent slowdown in yearly improvements is temporary -- and shared by other developed economies. After slipping to 1% in 2006 and 1.4% in 2007, productivity growth should settle into a pattern of 1.5% to 2.25% annual increases.

High productivity pays off in U.S. agriculture as well. The efficiency of American crop and livestock growers -- supported by a well-established research network -- is one reason the country ranks first in output of corn, soybeans, beef, poultry, dairy products and more. Of course, abundant arable land doesn't hurt, either. America's farmers are at little risk of losing their edge in coming years, despite rising production costs. Increased world population, better diets worldwide and a growing biofuels market should have agriculture chalking up big positives for the country for years.

Another winning factor for the U.S.: a well-developed infrastructure -- roads, bridges, railroads, ports, water, electricity, etc. The World Economic Forum considers U.S. infrastructure to be among the world's best, ranking it ninth, below Germany, France and four other European countries where roads, railroads and ports have been a funding priority for over a century. Singapore and Hong Kong, which also beat out the U.S., are more aptly compared with metro-area New York City.

It's true, though, that much of the country's infrastructure is deteriorating -- succumbing to age, overuse and too much maintenance deferred for too long. A swift infusion of capital will help and it's coming soon in the economic stimulus planned by President-elect Barack Obama to help jolt U.S. economic growth back to life. But to remain a big asset, U.S. infrastructure will need long-term investment.

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