It’s been well over a century since there was a question about where the most powerful and innovative businesses were located.  Over this time frame the United States has been the leader in military might, has been innovative and productive, and has had the most influential financial system.

That is changing, however.  And it’s changing quickly.

Here are three graphics that show why markets increasingly view the American economy as a “has been,” heading in another direction – China.

Global Employment Growth – 2007 to Current

Perhaps surprisingly, the behemoth of the group is not business in the U.S. or the E.U., but China.  The dominance amounts to the location of about half of all global jobs created since 2009 (sample is 65 countries; see table that follows).  Overall, of the approximately 102 million in net new jobs, 53 million have been created by individuals and businesses in China.

Far behind in second place are businesses and individuals in Indonesia at approximately 14 million.  Rounding out the top five are Turkey at 7 million, Philippines at 4 million, and the United States at 400K fewer than the Phillippines.

In a somewhat sad note, the other end of the net job creation scale is heavily comprised of E.U. member countries, including Spain at -2 million net new jobs, Greece at -1 million, Italy at -800K, Portugal at -600K, and Romania at -400K.

Growth in Employment since January 2009

IB-Global Employment Growth

 

Productivity

The second graphic shows the relatively mediocre performance of the American economy based on productivity.

On top, in terms of productivity, are workers in China, having experienced productivity growth of nearly 38 percent since 2009.  Next on the list are workers in Indonesia at 15 percent growth.  The remainder of the top five productively growing economies include Russia at 11 percent, South Korea at 9 percent, and Spain at 8 percent.

On the other end are the U.K. at 1.6 percent, Italy at 1.9 percent, and Switzerland at 2 percent.

The lackluster American experience is clearly shown with productivity in the U.S. smack dab in the middle at 6 percent.

Productivity Gains since 2009

Employee Earnings Growth

The third figure supporting the view that markets are increasingly giving American economic conditions a ho-hum view is employee earnings growth as measured by growth in unit labor costs. As a note of explanation, unit labor costs represent the percentage of output going to workers.  When worker pay is going up as a percentage of output, employee pay is usually going up. Unit labor costs have grown the fastest in China, up 65 percent since 2009.  Other high-growth earners include workers in Indonesia (up 47 percent), Australia (up 13 percent), South Korea (up 7 percent), and Canada (up 7 percent). On the south end, as with employment and productivity, business conditions in E.U. member countries look terrible.  On the bottom is Spain at -9 percent, Japan at -5 percent, and Switzerland at 1 percent.

Unit Labor Costs since 2009

Overall, although the U.S. still has a very influential military and large economy, the recent growth trends have led markets to increasingly abandon the U.S. as a global leader for growth, instead switching attention to such countries as China and India.

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Over the past thirty years there has been an emergence and almost deification of retail sales as the driver of economic growth.  For instance, in the U.S. it is quite common to hear economists talk about how 70 percent of GDP growth stems from consumer spending and therefore if consumer spending dries up, so does GDP growth.

Ignoring for the moment the illegitimacy of the argument once one begins to consider productivity, investment, and other real growth drivers (i.e. the consumer is a follower, not a leader), here is a look at the global retail sales recovery according to national statistics.  This matters for investment banking professionals in that it affects where future global deals may be sourced, as well as affecting investment bankers’ advice on marketing and overall strategy.

Global Retail Sales Growth Since 2007

Likely unsurprising, the country that has experienced the largest growth in retail sales is China at about 183 percent.  In a distant second place is Brazil at 148 percent growth since 2009. The third fastest growing consumer base is Canada at 68 percent, followed by Russia at 61 percent and South Korea at 46 percent. The bottom end of the spectrum includes Spain at -16 percent, Japan at 4 percent, Mexico at 7 percent, Italy at 7 percent, and Switzerland at 8 percent.

Interestingly, right in the middle of the group is the United States at 33 percent, grouped with Sweden, Norway, the U.K., Australia, Belgium, Germany, the Netherlands, and France.

The shifting of the global consumer to non-western countries largely indicates that investment banking professionals should give greater attention to how strong demand for their services will perform in fast growing countries.  Focusing only on so-called “advanced economies” may leave investment bankers in the out in coming years.

Retail Sales since 2007

Can the BRICs Keep it Up?

With these numbers as the backdrop, it likely comes as no surprise why markets continue to shift their attention to emerging markets in search of growth.  Three out of the four leading so-called emerging markets are in the top four (China, Brazil, and Russia).  The fourth member of the famous BRICs group is India, which lacks timely data to be included in the analysis.

Given the increasing importance of the BRICs, the question economists keep asking themselves is – can they maintain this growth?

The simple answer is, at least in the case in three out of the four, yes.  There’s an enormous appetite in the People’s Republic and India to become more like the U.S.  consumer.  Unless something happens with property values in China, there’s no sign of the Chinese consumer stepping away from large scale consumption. Of course, one of the four – Russia – likely will give up some of its growth given the ongoing fighting in what governments currently call Eastern Ukraine.

Overall, the global retail world continues to shift its attention towards consumers in China, Brazil, and other emerging market economies.  Although some economists have their doubts about the sustainability of the emerging market consumer, every indication is that these emerging economies will continue to become more like American consumers rather than revert to a slower growth path.  Investment bankers who ignore this fact will certainly become dinosaurs in a field generally on the cutting edge of market and consumer research.

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Financial market observers, investment bankers chief among them, have long theorized about the relationship between the growth in the money supply and the performance of equity markets. Here’s an empirical update on the discussion.

Money Supply Growth

The first chart below shows the growth in money supply by country since 2007, as measured by M2.  As a brief reminder or introduction, M2 is the sum of total currency in circulation and in bank vaults, bank reserves, traveler’s checks, demand deposits, checkable deposits, savings deposits, and time deposits.  All numbers are in local currency; some countries were excluded due to lacking data.

On top in the money supply expansion game is Venezeula, with an overall growth of 867%.  The next largest expander has been Azerbaijan at 755%, followed by Ghana at 583%, Mongolia at 558%, Bolivia at 455%, Iraq at 377%, and Argentina at 354%.

On the bottom, the most prudent of central banks includes Portugal, with a growth in assets since 2007 of just 2.2%.  Portugal is followed by Ireland at 2.9%, Greece at 4.1%, Luxembourg at 13.7%, and El Salvador at 16.8%.

money suply

Growth in Equity Market Values

With the growth in money supply as the first side of the coin, the other side is the growth in equity prices.  Here’s the look at the performance of equity markets, by country, over the same period, 2007 – 2014.

On top in the equity market appreciation game since 2007 is the national exchange of Iran, with total appreciation of 670%.  The other four of the top five performing national equity markets include Argentina at 237%, Indonesia at 177%, Philippines at 121%, and Thailand at 116%.

On the other end, the top 5 poorest performing equity markets since 2007 include Botswana at -98%, Cyprus at -74%, Greece at -58%, Kazakhstan at 58%, and Macedonia at -56%.

equity

Putting the Two Together

With the two components addressed, here’s the connection between the expansion in money supply and the performance of equity markets.

The scatterplot graphic shows the correlation between the two, with each dot representing a country month.  The plot is from 2007 to year-to-date 2014. The positive and statistically significant regression line indicates that as a given country’s money supply increases, so does the given country’s equity markets.

As a caveat, all numbers are in local currency values.  Increases in a country’s money supply certainly affects other variables, including inflation and exchange rates.  A more complete analysis may want to include these factors.  With this caveat taken into account, the main conclusion still stands – money supply increase are generally correlated with equity market appreciation.

Interestingly, the correlation coefficient comes out to 0.28, meaning that a 1% increase in the money supply is correlated with a 0.28% increase in a given country’s equity market.

correlation

Concluding

Overall, in inspecting the relationship between the growth in money supply and the performance of equity markets, it certainly appears as though the two are connected.  Of course, before arriving at a complete conclusion, other variables may need to be included, including country inflation and exchange rate changes.

With the caveat that correlation does not imply causation, one could presume, simply based on correlation and common sense, that when central banks start getting serious about reducing the money supply (if they ever do), equity markets would be one of the first areas where the effects would be felt.

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A Look at the Federal Funds Rate by President

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Market observers (investment bankers chief among them) have long debated how political Federal Reserve policy is.  Some economists think officials at the Federal Reserve are completely immune from political pressure, akin to the way some legal observers think Supreme Court justices are impartial observers.  Others, perhaps the more enlightened ones, see Federal Reserve policy as […]

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If you had to guess which financial sector has seen the best recovery in employment, which would you guess? Would it be the popular, but beat-down hedge fund industry? Perhaps it would be the private equity industry given the strength in mergers and acquisitions recently and the availability of cash? On the other hand, maybe the industry […]

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