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Client Resources
July 2004 As we swing into another vigorous political election cycle, we will be hearing from many sides on the issues of the day. I want to comment on three issues that always seem to raise concerns: the Federal deficit, the U.S. economy, and employment.
The Federal deficit is currently at $407 billion (over the last 12 months) and projected to rise to $521 billion for this fiscal year. The total gross Federal debt outstanding is about $7.5 trillion dollars and rising. These numbers sound big, and in many contexts they are, while in others they are not.
Let us first look at the bright side. While a $521 billion deficit is large, as a share of GDP it amounts to 4.5%. That compares to deficit to GDP ratios of about 3% in Europe and 6% in Japan. The gross debt to GDP ratio in the U.S. is about 65% (down from a 67% peak in 1996), compared to a 75% ratio of debt to GDP in Europe and a whopping 140% ratio in Japan. To get to Japan’s debt to GDP ratio, the U.S. would have to run additional deficits totaling between $8 and $10 trillion dollars! I am not recommending fiscal policy similar to Japan’s, but I did want to put the size of the deficit in context with those of other countries.
That said; let us look at the problems. Yes, with an $11+ trillion economy (GDP) that is expanding about $500 billion a year, we can support a $500 billion deficit for now. But, what about down the road? Here is the rub – we have a rapidly aging population (the baby boomers) that will be retiring and starting to collect Social Security and Medicare benefits in about 15 years. At that point, the Social Security system, which currently has a small surplus, drops sharply into large deficits for many years.
So, should we do something now to prepare? Last week Fed Chairman Greenspan gave some support for two options: 1) cut future benefits and 2) partially privatize the system. The linkage of these two options by Greenspan is not an accident. The problem with option 1 is that if future benefits are cut (or payroll taxes increased again) then the return on investment for a worker who is in the 20 to 40 year old range goes negative. In other words, right now a 30 year old worker who pays into Social Security can expect to get back just about the same amount after he or she retires – no interest, no investment income. If future benefits are cut, then their return goes negative. Partial privatization may allow these people to have a retirement investment account that could grow. Another helpful option would be to get the Federal budget back into surplus and retire some of the current debt over the next 15 years (that is – go back to running budget surpluses) so we would have borrowing capacity to cushion the heavy future retirement expense. We tend to think all three options will be used.
The Economy The U.S. economy is doing well. The U.S. Commerce Dept. recently reported that real GDP rose 4% in the fourth quarter of 2003. The Wall Street reaction to that fourth quarter growth rate was disappointment because the “consensus” was for a bit faster (5%) growth. We are not as concerned and should point out that GDP numbers are generally revised after they are first published. Even taken at face value, a rise of 4% coming on the heels of a super strong 8.2% rise in the third quarter is impressive. Bear in mind that GDP has risen 4.3% over the last four quarters, which is almost as strong as during the 1990’s boom. And most of the growth in 2003 was in the second half where GDP growth averaged 6.1%. We think we are in the midst of an economic acceleration.
Employment Another worry is employment. Some analysts are saying that we need even faster GDP growth to generate additional employment. So far, the U.S. Labor Dept.’s business survey reports a net loss of 74,000 jobs over 2003. However, the Labor Dept. has another large survey of persons, not businesses; that survey shows a net gain in employment of two million over the year. We think the truth is probably between these two surveys. At some point, with strong GDP growth, companies will have to shift over to substantial further hiring. Taking a longer view, over the last 30 years GDP in the U.S. has averaged a 3% growth rate and employment gains have averaged 1.7 million per year (that is 52 million added jobs over 30 years with GDP chugging along at 3%). So, it is a bit of a stretch to think that we have to grow a lot faster now to increase employment.
These are very tough political and demographic issues that, while not a threat to the U.S. economy and financial markets today, will grow worse over time and the sooner we address them, the less painful the solution will be. As always, please feel free to call us with any questions or concerns.
Now for an update on the Sequoia front.
Our most significant effort over the past quarter has been the continued development of our client information management system. The software, called Goldmine, allows us to track every interaction that any of our team members has with you. All activities and follow up items are tracked in this system as well. While not revolutionary in its own right, it allows us to work more effectively as a team and to put systems in place to check and double check that our responsibilities are taken care of as efficiently as possible.
As I reported to you in our last letter, we opened our Columbus office ahead of plan in November. Gary Wallberg has been working on the transition of our existing clients in this market and is now beginning to work on building our new presence here. Our best clients have always come from referrals from satisfied clients. If you know of someone whom you feel would benefit from our services in Columbus, we would welcome the opportunity to meet with them.
Our Akron office move went well. One of our primary motivations for the move was more conference space. We intend to use some of the systems we installed in the conference room to provide you with more interactive graphs and charts in financial plan delivery and update meetings. We are pleased with our new space and look forward to hosting you in the future.
We have noticed a few problems recently with “spam blockers” on certain internet services. We have either sent out emails or you have sent us emails that never arrived. The increase in viruses and unsolicited messages has caused a lot of internet service providers to crack down on their spam blockers and sometimes throw the good out with the bad. If you send us an email and we do not respond within 24 hours, please send it again or better yet call us to see if we received it. I would much rather receive two requests than have a request of yours go unanswered because we never received it. We will be doing the same on communication that we send out to you.
Finally, we want you to know how much we appreciate your business. We thank you for the trust you have placed in us. If you should have any questions or concerns, please do not hesitate to contact us.
Sincerely,
Sequoia Financial Group, LLC Thomas A. Haught, CFP® President |
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