FORECASTS & TRENDS E-LETTER
by Gary D. Halbert
October 6, 2020

Two Huge Long-term Headwinds For US Economy

IN THIS ISSUE:

1. US Demographics & Productivity Look Bad For Growth

2. Women in the US Are Having Fewer & Fewer Children

3. The Trend in US Productivity is Also Discouraging

4. Conclusions & The Challenges Facing Investors

As long-time readers know, I tend to be upbeat about the economy and the stock and bond markets, and that has certainly proven to be the correct position to hold over the last 20-30 years. However, the US economy and the financial markets are facing some increasingly negative headwinds over the next few decades, which I will begin to introduce today.

Two serious negative headwinds going forward are: 1) A shrinking US workforce in the years ahead, due to our falling birthrate; and 2) An accelerating decline in US worker productivity. These are two of the most critical economic inputs which have the potential to limit growth in the economy for years to come.

I should point out the United States is not alone in facing these challenges. Japan and much of Europe have been dealing with them for years. So, it is not as if we are about to fall off a cliff. What it does mean, however, is that economic growth is going to be harder and harder to come by in the years ahead.

We all need to recognize the importance of these two troubling trends and plan for how we will deal with them. They are likely to affect everything from the economy to our jobs to the markets and therefore to our investments. As a result, I expect I will be writing about these developments periodically for months and years to come. Let’s get started.

US Demographics & Productivity Look Bad For Growth

For years, America has been the world's largest economy. It has also grown at a faster rate compared to other developed countries. Since 1990, US GDP has risen an average of 2.5% annually -- while Western Europe's economies have grown by only 1.7% over the same period.

But recently, one of the biggest drivers of American economic growth has turned negative... and another is steadily weakening. That’s what we’ll delve into today.

To begin, trends in the US economy are shaped by numerous factors. Yet two of the most important factors are:

1. The size of the working-age population; &
2. The productivity of those working people

This means if more people in a country are doing economically productive things (like building houses, working in retail, making cars, etc., etc.) -- and they do it quicker (getting more done in a workday) -- the overall economy will grow. It’s all about supply and demand.

For decades, the rising number of working-age folks in the US (considered to be people aged 15 to 64) has been a big driver of the American economy. From 1980 to 2020, that figure jumped by 45%, to nearly 206 million working people.

But early last year, this figure went into reverse for the first time since being recorded. That's right: In 2019, the number of Americans of working age declined, by 0.11%. This is a tiny drop, of course. More importantly, as you can see in the chart below, the trend has been down since 2000. The available workforce grew by 2.19% in 2000, 1.26% in 2007 and 0.65% in 2015. And so far this year, it's still in negative territory.

The number of people of working age is determined by the birth rate and by immigration. For centuries, the American brand of "the land of opportunity" has attracted the smartest and most motivated people from the rest of the world.

Since 2016, however, the number of legal immigrants entering the US has fallen by an average of 43,000 annually, according to Foreign Affairs magazine.

Women in the US Are Having Fewer & Fewer Children

When the fertility rate in the US hit a 35-year high in 2007, at 2.12 births per woman, even that level was only just above the "replacement level" fertility rate of 2.1. The replacement level is what it sounds like -- the average number of children born per woman so that a population replaces itself from one generation to the next.

This rate has mostly declined since 2007 to 1.73 children per woman in 2018, according to the World Bank. That matched the all-time low from 1976. As recently as 1960, the average American woman had 3.6 children.

If "demography is destiny" -- a quote attributed to 19th-century French sociologist Auguste Comte -- then economic growth in the US will suffer over the next decade or longer. This may seem obvious, but as the number of new additions to the working population falls, unborn children can't join the workforce 15 years later.

Many countries in Europe, along with China and Japan, have a fertility rate even further below replacement levels than the US. South Korea, for example, is the least-procreative country in the world, with an average of just one child per woman.

The fact that birth rates are falling in other developed countries is bad for the American economy -- these are major trading partners. This means one of the long-term structural advantages -- and growth drivers -- of the American economy is slowly disappearing.

Most demographers do not expect this trend to reverse anytime soon.

But what about productivity, the other part of the growth equation?

The Trend in US Productivity is Also Discouraging

While worker productivity rebounded in the 2Q of this year, growth in productivity -- which is output per employed person -- has been declining for more than a decade in the US, as you can see in the chart below. During the decade from 1990 to 2000, productivity was rising by an average of 2.3% every year. Yet over the past 10 years, it has been increasing at only 1.4% per year (actually a little less than 1.4% if we consider 2020).

That's partly because the one-off jump thanks to the computer boom in the late 1900s has long since worn off. And also, during times following eras of increased productivity, it's harder to get better from the higher base level created by the previous boom. The rebound in productivity from 2000-2007, driven largely by computers, will be hard to outdo going forward.

Still, like the fertility rate, the American productivity improvement is better than most other developed economies. For example, Germany -- notwithstanding its historical reputation for efficiency -- has become just 1% more productive per year since 1980, compared to 1.7% in the US over that period.

After all, the difference between 1% growth and 1.7% growth may sound like statistical pocket change. Yet over time, the power of compounding kicks in, and those seemingly small differences become very significant.

An economy (or bank account, for that matter) that's growing by 1% will take nearly 70 years to double -- while 2% growth will halve the time needed to double in value to 35 years. And at 3%, it's 23 years. Small numbers can have a super-sized impact over time.

But unless productivity growth improves – or there's a coronavirus-inspired baby boom – American GDP growth is going to be sailing into some stiff winds in the coming years. The same goes for most of the rest of the developed world, as well as in a growing number of emerging markets where the population is growing old before it gets rich.

Conclusions & The Challenges Facing Investors

The size of the US workforce (age 15-64) started to shrink in 2019 for the first time since records have been kept. Due to our falling fertility rate, this trend is likely to continue, perhaps indefinitely -- especially as Baby Boomers continue to retire in record numbers.

This trend will inevitably lead to lower productivity unless new innovations are introduced which make workers significantly more efficient and productive. While new innovations will definitely be forthcoming – they always are – it remains to be seen if robotics and artificial intelligence, two budding innovations, will have the kind of impact computers have had on the world.

If we are stuck with a productivity rate of 1.4% per year, and likely even lower, this will take a toll on economic growth in the years ahead. While the stock markets have shaken off the Covid-19 pandemic this year and recovered briefly to new record highs, a slower long-term growth rate will eventually take its toll and give way to a bear market.

Repeated studies show that most investors are ill-prepared to deal with a bear market, given the preponderance of the “buy-and-hold” mentality. Unfortunately, the next bear market, whenever it comes, will be very ugly for most investors.

Fortunately, at Halbert Wealth Management, we offer professionally managed equity strategies which can position either long or short or in cash depending on market conditions. We also offer several successful strategies which do not invest in the stock markets at all – think real estate, insurance-linked assets, private equity and other alternative strategies – most of which can be used to generate income.

And we are continually doing due diligence on additional non-correlated strategies which come knocking on our door.

While most of you reading this have not yet chosen to invest with us, that time may be fast approaching. We can all agree this bull market in stocks will not continue forever. When that time comes, we’ll be waiting for you.

Finally and in closing, my thoughts and prayers go out to President Trump and First Lady Melania. I wish them a speedy recovery. It is encouraging that President Trump was deemed well enough by his doctors to return to the White House yesterday.

Wishing you profits,

Gary D. Halbert

SPECIAL ARTICLES

Covid-19 “Baby Bust” – Half a Million Fewer Children in 2021

Worker Productivity Jumped in 2Q as Expected, But Has Been in Decline For Over a Decade

Gary's Between the Lines Blog: Consumer Confidence Spiked Higher In September

 

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