Demographics and the Economy

One of the more interesting studies is to parallel demographics and economic growth.  There are some logical reasons to look at these two in tandem.  First, the largest segment of our economy is consumer spending - what you and I spend on food, clothes, gas, and our houses - just to name a few items.  There are typical patterns of consumer spending that are evident for the average person in a certain demographic group.  An example is you usually do not have retired people buying a larger or new house or making major consumer purchases, since they tend to have a smaller disposable income than people, say, in their 40s.  If the trends in spending continue, one could predict the expansion or contraction of consumer spending, accounting for around 70% of economic activity, based upon demographic changes.

Young people tend to cause inflation as they produce little and cost a lot.  As young people grow up, they enter the workforce and become productive new workers; thus, increasing labor supply and also higher spending consumers creating more consumer demand.  As one goes through life, the consumer demand tends to increase with purchasing a house and raising children.  As a person grows in their career, their income tends to increase and demand grows as well.  At some time, people begin to switch from being a consumer to being more of a saver as they look toward retirement.  Expenditures are reduced as their home mortgage is retired.  Further cuts are being made as the person approaches retirement in expectation of a reduced level of income.  Expenses in other areas, such as healthcare and long-term care, increase.  As a general rule, those who are in the retirement age category create less demand than those that are younger. 

So how does this impact an economy?  A good example is Japan.  Japan had its baby boom prior to the US and is between 25-40 years ahead of us on the demographic curve.  Throughout the 1980’s, Japan’s economy and stock market soared.  In early 1990, the Nikkei 225 Index was over 35,000 yen.  Then the economy began to slow down, as the aging population demanded less.  Japan had eight major monetary expansions in the 1990s.  This kind of reminds one of the Fed’s Quantitative Easing. In Japan, none of that easy money policy expanded the economy, and prices began to deflate.  The overnight interest rate fell to a fraction above 0%, which is where it remains today.  The Nikkei is sitting around 15,000 yen today, a third of the level it once was. 

Japan is still in a comatose economy with little growth and a deflation of prices with the lack of demand.  The major monetary expansions and government borrowing have continued, and the debt bubble in Japan has never been de-leveraged.  Prices do not change, even though the government is printing money at a rapid rate.  Is this starting to sound familiar?

Harry Dent’s new book, Demographic Cliff:  How to Survive and Prosper During the Great Deflation of 2014-2019, is an interesting read on this subject.  He believes “demographics are the ultimate indicator that allows you to see around corners and predict the most fundamental economic trends…decades in advance.”  He contends that the demographic tide is turning against the aging US.  As Boomers retire, more deflation will occur and weaken the economy. 

The US reached its current demographic peak spending level between 2003-2007 and is headed for the demographic cliff. Germany, England, Switzerland, China are all headed there too.  China is a few decades away from the fate of the others.  The stock market will crash as the worse economic trends hit in the next 5 years.  The US economy should also experience another major slowdown in this period and will be unable to expand because of the increased amount of Fed intervention. 

This impact will hit the everyday consumer more, who never came out of the last recession.  The true winners of the Fed’s monetary expansions are the rich, as asset prices are aided by monetary stimulus.  If the population changes, in which people dying outweigh new consumers, there will be fewer spenders, borrowers, and investors to participate. 

Our country has debt at insane levels, and it keeps increasing as politicians act like we can continue with endless monetary injections and bailouts to get over what they think is a short-term crisis.  Or they may think a short-term boost is all they need to buy them enough time to reach the next election.  The underlying problem is a long-term structural problem in nature and has implications we cannot run away from.

A business will have to become lean, focus on cash flow, defer major capital expenditures until they are absolutely necessary and sell non-producing assets to continue to be a factor in the years to come.  Dent argues some of the biggest challenges in the coming years are private and public debt, health care and entitlements, and authoritarian governments around the world. 

If Dent’s predictions come true, we are in for a real struggle.  We already have signs of weakness in the economy on the horizon.  We currently have 15% of the US population on food stamps.  MSN Money reported recently that 43% of American families spend more each year than they make.  The labor force participation rate is at its lowest level since the Carter Administration.  A question is that as boomers retire, will companies replace them with younger workers, or will they seek to generate more productivity with the remaining staff?  This would further reduce employment and income, and subsequently, reduce economic activity.