Wednesday, May 06, 2015

Demographics are Now Improving

by Bill McBride on 5/06/2015 06:46:00 PM

The Financial Times blogs has a blog post about the demographic impact on the U.S. economy: The US economy’s demographic dividend is fast turning into a deficit. A few excerpts.

Demographic change is creating major headwinds for the US economy ... One key factor is that there are more older people than ever before, due to a combination of the ageing of the US baby boomer generation (those born between 1946 and 1964) and increasing life expectancy. Older people tend to spend less, as they already own most of what they need and their incomes decline as they enter retirement.

Equally important is the collapse that has occurred in US fertility rates since the peak of the baby boom. These have nearly halved from the 3.33 babies/woman level of the mid-1950s to just 1.97 babies/woman today, below the level required to replace the population. As a result, the size of the 25-54 age group, historically the main wealth creators, has plateaued in the US.
If this post had been written a decade ago, it would make more sense.

Last year, I posted some demographic data for the U.S., see: Census Bureau: Largest 5-year Population Cohort is now the "20 to 24" Age Group, Decline in the Labor Force Participation Rate: Mostly Demographics and Long Term Trends, and The Future's so Bright ...

I pointed out that "even without the financial crisis we would have expected some slowdown in growth this decade (just based on demographics). The good news is that will change soon."

Changes in demographics are an important determinant of economic growth, and although most people focus on the aging of the "baby boomer" generation, the movement of younger cohorts into the prime working age is another key story in coming years. Here is a graph of the prime working age population (this is population, not the labor force) from 1948 through March 2015.

Prime Working Age PopulatonClick on graph for larger image.

There was a huge surge in the prime working age population in the '70s, '80s and '90s - and the prime age population has been mostly flat recently (even declined a little).

The prime working age labor force grew even quicker than the population in the '70s and '80s due to the increase in participation of women. In fact, the prime working age labor force was increasing 3%+ per year in the '80s!

So when we compare economic growth to the '70s, '80, or 90's we have to remember this difference in demographics (the '60s saw solid economic growth as near-prime age groups increased sharply).

The prime working age population peaked in 2007, and appears to have bottomed at the end of 2012.  The good news is the prime working age group has started to grow again, and should be growing solidly by 2020 - and this should boost economic activity in the years ahead.

Demographics are improving in the U.S.!