- An aging population diminishes GDP growth and US GDP growth is bound to further decline.
- Fertility rates are at an historical minimum and the labor force participation is falling.
- Corporate earnings growth is correlated to GDP growth.
One of the worries for the stock market apart from interest rates and a slump in commodity prices is baby boomers retiring and selling their stocks in order to fund retirement. As the fertility rate is falling, the worry is that there will be less people standing in line to buy those shares.
This article is going to elaborate on the current situation by analyzing the most important takeaways from the National Center for Health Statistics (NCHS) latest births report, demographic trends and their impact on GDP, and corporate earnings.
As we all know, the birth rate per 1,000 women aged from 15 to 44 is falling, but something often disregarded is that the number of births is still very high.
Figure 1: Birth rate vs number of births. Source: NCHS.
The all-time peak in the number of births was reached in 2007 and has been slowly declining since, but it is still relatively high when compared to the 1970s. This high number alongside immigration makes the demographic picture of the US positive. The number of inhabitants is growing at a constant rate.
Figure 2: US population. Source: Trading Economics.
A growing population is essential for a healthy economy as it enlarges the labor force, provides a larger domestic market for the economy and encourages competition. The high number of new born babies does not mean that the fertility rate is the same; the larger base of people keeps the newborn numbers high but the fertility rate is decreasing.
Figure 3: Births per woman aged 15-44. Source: Wall Street Journal.
The lower fertility rate brings to another well-known issue: population aging and worries about ‘demographic time bombs.’ One of the biggest fears is that the future generations will fail to meet pension requirements from an ever increasing number of retired workers.
Not only that, research from the Center for the Study of Aging (CSA) has shown that for every 10% increase in the fraction of the population aged 60+, a 5.7% decrease in GDP per capita can be expected as the labor force diminishes. The number of Americans aged 65 and above is expected to double by 2060.
Figure 4: Percentage of US population in selected age groups. Source: Population Reference Bureau.
According to the CSA research mentioned above, the increase from 15% to 21% of population being older than 65 in the next 15 years should diminish US GDP per capita by around 20%. With the population expected to grow only 11% from now to 2030, the aging population will remove 10% of US GDP in the next 15 years. With increased global competition and increased US debt, we should not expect big US GDP gains.
The aging issue has already been having a negative effect on the US labor force participation for almost two decades.
Figure 5: US labor force participation rate. Source: Trading Economics.
This trend perfectly coincides with the slowing down of US GDP growth, confirming the thesis that an aging population diminishes the labor force and consequently, economic growth. The US GDP average growth rate has been 1.85% per year since the beginning of this century while the average for the 1990s was 3.38%, 1980s 3.16%, 1970s 3.3% and 1960s 4.46%.
Effect on Portfolio
Investors today should not expect the same returns in the next 50 years as the investors in the second part of the last century had enjoyed. The second part of the 20th century had an average yearly GDP growth of 3.72%, thus double the average GDP growth in this century as the population and the labor force were constantly increasing. Such an environment made it easy for companies to grow and find new opportunities.
This half century trend is now in reverse mode. Curiously enough, the year 2000 was exactly the end of the past trend and the beginning of the new trend. S&P 500 corporate earnings in the 1990s were growing at a geometric average of 6.6%, while earnings in this century grew at only 3.7% per year. This almost 50% decline in earnings growth is perfectly correlated with the 50% decline in GDP growth.
Buybacks and international growth are seemingly not enough to contrast the decline in US GDP growth.
Unfortunately, the FED can’t do much to fight the negative demographics trend. Monetary policies can have an effect but in the long term, productivity is what matters and with less workforce, productivity eventually declines. Declines in productivity bring increased debt levels as the previous standard is kept and investments are made with the hope of economic improvements. A similar situation is affecting Germany but in order to fight the trend, Germany allows a million immigrants (more than 1% of the German population) to enter and work in Germany per year.
With negative demographic trends we cannot expect high growth levels from the general US economy which brings to the conclusion that investments in mutual funds or the general market which were great for the 20th century will not do well in this century as the general economic situation does not allow similar corporate general performances. This will be the century of smart stock picking investment strategies.