The U.S. Is a Nation on the Cutting Edge of Change

The United States’ economy is in the midst of an extraordinary transformation, one that has the power to redefine America’s future. Across the country, the nation’s resilience in the face of adversity and its entrepreneurial spirit are providing unprecedented opportunities for companies and investors.

Indeed, across the nation, companies, universities and individuals are coming up with new ideas that are changing the way people live and new products that are boosting bottom lines.


"I think the technologies of the future, the industries of the future, are more likely to come out of the United States than anywhere else in the world."
Mike Kerr
Mike KerrEquity portfolio manager

That technological and industrial leadership is underpinned by a long line of entrepreneurs who have been willing to take risks, a characteristic that’s made the U.S. the most innovative economy in the world. That can-do attitude and the country’s reputation as the land of opportunity continue to attract the best and brightest from around the world.

slide3image-hiresThe recovery from the Great Recession seems as if it’s been frustratingly slow, especially in an economy that has a history of relatively quick recoveries from recessions. But feelings may be getting in the way of facts when it comes to economic growth.

While the economic recovery has not been speedy or steep, it has been consistent. After experiencing a decline that ranks as the worst since World War II, the U.S. economy has grown in all but two of the last 26 quarters. For much of the time, wage growth has been slow and the housing and automobile sectors have lagged. But those sectors have demonstrated their resilience and are now contributing to the nation’s economy. In fact, U.S. auto sales hit a record of 17.5 million vehicles in 2015. The U.S. economy is now larger that it was at its peak before the Great Recession. In 2015, the nation’s gross domestic product was an estimated $18 trillion, or nearly 25% higher that its 2009 level of $14.4 trillion during the financial crisis.

 

This remains a challenging environment for the economy. But the U.S. economy is resilient, and remains the world’s largest single-country economy (China is second, with $11.4 trillion GDP). The U.S. economy now accounts for nearly a quarter of global GDP, even though it has only 4.4% of the population, and the U.S. is likely to continue to have an outsize role in the global economy. The International Monetary Fund projects that U.S. GDP will reach $22 trillion in 2020.

 

The United States, which leads the world in spending on research and development, is expected to increase R&D spending 3.4% to $514 billion in 2016. That’s about 2.8% of the nation’s gross domestic product. While R&D funding isn’t the sole indicator of how a nation or industry will perform, the creation of new products, processes and technologies is one of the fundamental factors. Indeed, R&D can be one of the drivers of economic growth and corporate success.

 

The federal government and academia spend significant amounts on R&D, but industry is by far the biggest contributor, spending about $357 billion, or approximately 70% of the U.S. total. Many of the biggest spenders on R&D in the U.S. are in the technology sector, including Intel, Google and Microsoft. In the auto sector, Ford and General Motors spent about
$7 billion each in 2015, with the drive toward electric cars fueling much of the spending. Pharmaceutical companies are also big R&D spenders.

Worldwide, about $1.95 trillion is expected to be spent on R&D in 2016, up from $1.8 trillion in 2014. While the U.S. leads in spending, much of the growth in global R&D investments is being driven by spending in Asia, especially China. China is the world’s second-largest investor in R&D with forecast spending of $396 billion for 2016. Asian countries (including China, Japan, India and South Korea) now account for more than 40% of all global R&D investment.

 

When it comes to biopharmaceutical firms, the old saying is true — you’ve got to spend money to make money. In 2015, U.S. biopharma firms spent about $33 billion on research and development, or the bulk of the
$51 billion spent by the entire pharmaceutical industry. The biopharmaceutical sector’s significant investments in R&D have helped drive its contributions to the U.S. economy and allowed it to be a world leader in the development of new medicines.

R&D spending has helped create a host of biotechnology drugs, or biologics, that can slow the progression of a disease or, in some cases, cure a condition outright. Biologics are incredibly complex drugs, some derived from human genes. In 2014, the 10 top-selling biologics accounted for $73 billion in revenue for companies such as Amgen and Biogen. HUMIRA, an injectable drug made by AbbVie that’s used to treat rheumatoid arthritis, topped the list with $12.5 billion in sales.

 

The United States leads the way in the development of biologics, and is home to most of the world’s largest biopharma companies, such as Gilead and Amgen. These and other companies are developing therapies that are helping fight the war on cancer. Because the barriers to entry are so high in this arena, a successful biologic represents a long-term and unusually secure source of recurring revenue for the manufacturer. And that cash flow, in some cases, is being used to reward investors with dividends.

 

Top universities, tons of venture capital, hot startup companies — when it comes to innovation, is there anything the Bay Area doesn’t have? As fertile as the City by the Bay and Silicon Valley are when it comes to cutting-edge ideas and products, there is one thing Northern California lacks — a lock on good ideas. From the Twin Cities to Austin to Atlanta, the United States is a veritable idea factory, a nation with a “disruptive-innovation” mindset and the resources to turn concepts into cash.

 

In fact, several regions are becoming innovation hubs and drawing a new generation of inventors and investors. Austin, Texas, for example, seems to attract influential tech talent from around the nation and the globe. Notable companies like HomeAway, Indeed and Gowalla all got their scrappy starts in the city and a new Austin-based startup is making headlines on an almost daily basis. Indeed, funding for Austin startups surpassed $993 million in 2014, a 123% increase from the previous year.

Innovation is occurring across the nation. In Oregon, Nike, the footwear and apparel giant, received 554 patents in 2013. Minnesota’s Medical Alley is a renowned hotspot for health technology innovation, as well as a global destination for investment. The pacemaker, mechanical heart valve and hearing aid all originated in Minneapolis. From Seattle to Miami, innovative companies are coming up with new products, profit opportunities and, potentially, rewards for investors.

 

Can better batteries change the world? It’s looking increasingly like they can, and many scientists, engineers and entrepreneurs believe that a breakthrough in battery technology may be on the horizon. That could be a game changer for the way the world produces and consumes energy. A long-lasting affordable battery could enable the broader adoption of electrified vehicles and, when paired with alternative energy sources, store and deliver power around the clock, not just when the sun’s shining

 

The race is on among corporations to build better batteries. Nearly every major automaker has an electric vehicle for sale and many — notably Toyota and General Motors — are investing millions in designing new batteries to power them. The company that builds the first affordable electric vehicle to drive 200 miles on a single charge will reap the rewards, and the development could accelerate a global transition from fossil fuels to electricity as the energy of choice for the automotive world.

In the United States, Tesla Motors is among those leading the push for the battery revolution. Tesla has announced that in late 2017 it will deliver a battery-powered car that goes 215 miles on a single charge. The car will cost about $35,000. Elon Musk, the company’s chief executive, envisions a future in which batteries help the world run on solar power. “We have this handy fusion reactor in the sky called the sun,” Musk said recently. “You don’t have to do anything. It just works, shows up every day, and produces ridiculous amounts of power.”

To learn more about U.S. innovation, download The Long View: Investing in U.S. Innovation.