The U.S. economy–still the one to beat?


Is America losing its competitive edge? That's one conclusion you could draw by looking at the annual competitiveness rankings just published by the Geneva-based World Economic Forum. (They're the guys who throw the annual Davos wingding for the planet's political and economic elite.)

The WEF says that Switzerland–fourth in 2005–is now the world's most competitive economy. Finland and Sweden took the silver and bronze. The United States, which was No.1 last year, had to settle for sixth place this go-around.

Going from first to sixth in a ranking isn't such a big deal if you're a college football team that just graduated a lot of senior starters. But it's a massive move for a $13 trillion economy. And it's not like the Swiss economy is going gangbusters. According to the international Organization for Economic Cooperation and Development, Swiss GDP grew at a 1.9 percent rate in 2005 and is expected to grow 2.4 percent this year before decelerating to 1.8 percent next year. Now those may be some pretty snazzy numbers for the sclerotic economies of continental "old Europe," but such a performance here would cause apoplexia from Wall Street to Main Street. The U.S. economy grew 3.2 percent last year and has expanded at a 4 percent annual rate this year, though it is clearly slowing.

So what could have happened during the past 12 months that was so good for Switzerland and so bad for America?

Among the reasons Switzerland and Nordic countries scored so highly, said Augusto Lopez-Claros, the WEF's chief economist, were their "good institutions and competent macroeconomic management, coupled with world-class educational attainment." The big knock on the U.S. economy was its

potentially open-ended expenditure commitments linked to defence and homeland security, ongoing plans to lower taxes further, as well as other longer-term potential claims on the budget.

None of these complaints are new. On one front at least, the budget deficit, the situation has actually brightened a bit since last year–if only in the short term. (Baby boomer tidal wave alert!) The Congressional Budget Office expects this year's deficit to total $260 billion, or 2 percent of GDP. That's about $58 billion less than last year's budget shortfall, which was 2.6 percent of GDP. The average budgetary shortfall since 1965 has been 2.3 percent of GDP.

So why did the U.S. ranking fall so far, so fast if nothing much has really changed? Probably because the WEF "study" isn't based just on hard data, which aren't going to change dramatically from year to year. It's also based on an opinion survey of 11,000 business leaders in 125 nations, including some countries that were never polled before. That makes year-to-year comparisons problematic. And at least one country, Taiwan, has complained about the actual questions asked, noting that the "soundness of banks" ranking was determined by a single query asking for a 1-to-7 rating.

John Augustine, chief investment strategist at Fifth Third Asset Management, speculates that if global business leaders are bit more dour on America, it might be partly because of perceptions that the United States is turning away from free trade, such as with the controversy earlier this year over the deal to let a United Arab Emirates-based company run some key U.S. ports. "The survey might be picking up some of that," he adds.

Now if you choose to place stock in the WEF study, there's actually some good news in there for America. The five countries that finished ahead of the United States have a combined GDP of roughly $1.3 trillion, a tenth the size of the U.S. economy.

"I wouldn't be worried about them all," Augustine adds. "In fact, it's a good thing that these niche economies are doing things to improve their productivity and marketability."

Besides, those nations are not America's economic rivals of the future. The United States finished numero uno among the G-8 nations. As for India and China, the emerging economic superpowers whose economies may one day surpass America's? They finished 43rd (right ahead of Kuwait) and 54th (right ahead of Mauritius), respectively.