Wells Capital's Paulsen: US economy could smash expectations

US economic growth could surprise on the upside next year, driven by growing emerging market demand buoying the manufacturing sector, according to Wells Capital Management’s James Paulsen.

The $319 billion group’s chief investment strategist says US GDP can expand by 3% next year, significantly above the 2% consensus expectation, with an upswing in consumer confidence resulting in the wall of money parked in cash and bonds starting to flow back into equities. Third quarter GDP last week came in at a better than expected 2% on an annualised basis, up from 1.3% in the second quarter.

‘I think we are going to be surprised by global growth and the feeling that it is a sustainable recovery. The big catalyst will be a turn in emerging market economies,’ he said. ‘It’s important because if that happens, the $2 trillion on corporate balance sheets will come into projects as we see a rise in confidence.’

Paulsen says the slowdown in emerging market economies over the past 18 months was policy-led, but notes that the likes of China have moved back into easing mode, which all but eliminates the chances of the global economy sliding back into recession. ‘We’ll worry less about the eurozone if emerging markets are growing. It will revive the manufacturing sector, which led the last recovery for the first time in years,’ he said.

Marshall Plan pays dividends

He said the US is now reaping the benefits of what was effectively a Marshall Plan-style programme of building up emerging markets at the expense of its domestic manufacturing sector over the past two decades. By having an overpriced dollar and outsourcing the production of goods overseas to countries that have low labour costs and negligible employment and environmental laws, the US ran with a significant trade imbalance to support the development of new trading partners.

‘We are seeing a major switchback,’ Paulsen said. ‘Now the emerging markets have free floating currencies, give workers benefits and have to adhere to environmental rules, some of that manufacturing is coming back.

‘So if the US was growing by 3% but losing 1% of that through the trade imbalance, if manufacturing starts to add 1%, eradicating the trade imbalance would equate to a 2% swing in GDP.

‘That is huge. They have a young demographic and we get a big piece of that market, which will help us balance the public deficits and bring down unemployment. We created a new world asset through this emerging market Marshall Plan and we will get the trade balance back from a lot of countries.’

This improvement in trade and particularly sales to emerging markets reduces Paulsen’s concerns about the US fiscal cliff, which he says is one of a series of problems since 2008, including the financial crisis and Lehman Brothers, the housing market and stalling economic growth.

US election a sideshow

Paulsen, who was in the UK to give a keynote speech at Raymond James’s investment conference, said he ‘doesn’t care’ who wins the US election as either will be remembered as a great president if the US moves back into a strong period of growth.