During the period 2007-2012, GDP in the United States has grown from $14 trillion to $15.6 trillion. A growth of $1.6 trillion amidst the worst financial crisis in decades can be considered to be relatively robust. This article looks into the finer details of the US GDP to conclude that there are several areas of concern related to growth and its sustainability.
I will be focusing on the major contributors to GDP growth since 2007. Of the total GDP growth of $1.6 trillion, the manufacturing sector contribution is 10.2%. However, 6.5% of the contribution comes from non-durable goods and only 3.7% ($60 billion) from durable goods. In other words, this segment growth has been driven by food, beverage and tobacco products coupled with increases in the price of petroleum and coal products. Certainly, this data standalone does not bring in a lot of optimism.
The educational and healthcare services have contributed a significant 16.2% to GDP growth during the period 2007-2012. Over 80% of this growth comes from healthcare and social assistance. I would categorize this as forced consumption as demographics result in higher healthcare spending. Also, the category of healthcare and social security would largely come under government supported growth. The most important point is that no country would like growth to come in the form of high healthcare spending. This trend can spell doom for government finances in the long-term.
The government sector (Federal, State and Local) has also contributed a meaningful 16.1% to GDP growth since 2007. If one combines this with the healthcare and social security spending, nearly 33% of GDP growth since 2007 has been as a result of government spending. In general, a smaller government sector contribution to GDP is an indicator of a healthy economy while a higher government sector contribution indicates a fragile economy. With ballooning debt and continued high deficits, if the government were to cut back on spending, the economy would certainly enter into another recession.
The finance, insurance, real estate, rental and leasing segment have also contributed a healthy 18.1% to GDP growth since 2007. Nearly half of this growth has come from higher rents. As home prices crashed, some homeowners have gained from an increase in rentals and rental yield. Going forward, as the rentals consolidate at a higher level, it would be interesting to see the growth trend from this component of the GDP.
The professional and business services have contributed 15.4% to GDP since 2007. This is positive and I expect growth in this segment to continue over the long-term.
Growth driven by healthcare and government spending might also continue over the long-term. The key point is that it does more harm than good to the economy in terms of worsening the finances and putting greater pressure on the working population. With trillions of dollars of unfunded Medicare, Medicaid and social security spending coming up over the next few decades, the biggest concern will be funding the needs of an aging population.
I am of the opinion that the government sector needs to cut back on spending with some stability evident in the economy. Instead of excessive government spending to boost growth, policies need to be favorable to trigger growth in the manufacturing sector. Only a finer blend of production and consumption can bring back sustainable growth and improve government finances.
For now, in line with the discussion above, I would consider investment in the healthcare sector for long-term. The Vanguard Health Care ETF (VHT) looks interesting and can be considered for one's portfolio. The Vanguard Industrials ETF (VIS) is also a good investment option providing exposure to sectors such as industrial conglomerates, aerospace & defense, industrial machinery, construction & farm machinery & heavy trucks and railroads. With expansionary monetary policies, the S&P (SPY) is likely to trend higher in the long-term and exposure to the index might not be a bad idea. Also, portfolio diversification can be ensured by holding cash and also considering exposure to physical gold or gold ETF (GLD).