Globalization, GDP

Wag the Dog

By, 01/25/2008

Story Highlights:


• World stocks had a wild ride this week, and many feared US banking problems were spreading to the rest of the world.
• The US is the biggest country by market capitalization and GDP, but when properly scaled, it's only a fraction of the world economy.
• US companies depend on foreign consumers to supply much of their revenue, and the US is more likely to follow a world downturn than the other way around.

(Editor's Note: MarketMinder does NOT recommend individual securities; the below are simply examples of broader themes we wish to highlight.)

This week investors experienced see-sawing markets in the US and abroad. But of the many fears espoused, perhaps the most often written about was that banking problems in the US have spread to the rest of the world. Like some dreaded cold, leaping between coworkers via handshakes and sneezes, recession fears floated lazily to the jet-stream then zoomed to Europe and the Pacific Rim.

Developing Economies Face Reckoning as US Stumbles
Patrick Barta and Marcus Walker, The Wall Street Journal
http://online.wsj.com/article/SB120113771673811967.html?mod=todays_us_page_one

That the US is the primary driver of the global economy is not a new theory. After all, the US is worth a whopping $13 trillion dollars by GDP—a number so astronomical, it's difficult for most non-astrophysicists to contextualize. And for years the US has led both innovation and consumption.

But how dependent is the rest of the world on US economic health and might it realistically be the other way around? Sure, the US is still the biggest country by market capitalization and GDP, but in today's global economy, it's not sufficient to judge by absolutes. Instead of comparing country to country, it's far more important to compare country to world.

And in that context, the US just isn't that big any more. According to the IMF, world GDP (including emerging markets) is a staggering $53 trillion. And with its $13 trillion GDP, the US is just 25% of the global economy. If you believed most market experts, the US would be the proverbial tail wagging the dog if it could lead a global recession.

But the story doesn't end there—the US is now more dependent on foreign consumption than ever before. Standard and Poor's announced in a 2006 press release that S&P 500 companies reported 44% of their sales were generated from outside the US. Approximately 23% of all revenues for S&P 500 companies come from non-US consumers, and 17% of S&P 500 firms derive over 50% of their revenues from overseas. Since the report these numbers have surely grown:

Caterpillar Profit Climbs 11% on International Demand
Courtney Dentch, Bloomberg.com
http://www.bloomberg.com/apps/news?pid=newsarchive&sid=a14Q6JpHj1mE

So, should foreign consumers stop demanding iPhones, heavy machinery, or (heaven forbid!) Mom's apple pie—a large number of US companies would suffer. We depend on the rest of the planet economically more than the rest of the planet depends on us.

And right now, the non-US economy is doing just fine. In fact, foreign companies have been outperforming US companies for the majority of this bull market. Regardless of whether the US economy slows in the near future, global growth will likely continue to be strong.

Have a great weekend!

*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.

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*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.

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