INSIGHT: Demographics and shale will help determine US growth

12 February 2014 16:57  [Source: ICIS news]

By John Richardson

PERTH (ICIS)--Just a few short weeks ago, the consensus view of the US economy was that it would achieve what President Obama has characterised as a “breakthrough year” in 2014.

Now investors feel very differently. Two weak job reports in  a row, disappointing data on manufacturing and a reduction in the number of people signing contracts to buy new homes have contributed to a decline in both US and global stock markets. This seems hardly surprising, given the important role that American spending plays in driving worldwide growth.

But a Perth, Australia-based financial analyst repeated the widely-cited argument that the recent spate of weak economic data doesn’t necessarily support any long-term conclusions.

“Exceptionally cold weather could be a major factor in weaker-than-expected jobs growth and manufacturing data – and it could well be that the February jobs report bounces back, leading to a recovery in equities,” he said.

“I think that the pessimism is being overplayed right now, for obvious investment reasons, just as the optimism was overplayed a few weeks ago.

“My gut feeling is that we’ll see these short-term peaks and troughs for years to come as the US economy, along with the global economy, muddles through. We could be in this situation for a decade, perhaps longer.”

What might “muddle through” in the US amount to? Much slower growth over the next decade than the average since the 1950s, according to the Congressional Budget Office in its Economic Outlook: 2014-2024, which was released on 4 February.

The CBO has, however, predicted an acceleration of US GDP growth until 2018 (see table).

CBO GDP forecasts 2014

Source: Congressional Budget Office

The problem is that between 2018 and 2024, it sees average growth falling to just 2.2% - well below the 3% viewed by many economists as the dividing line between a healthy and an ailing economy.

“That difference stems primarily from demographic trends that have significantly reduced the growth of the labour force,” wrote the CBO, in the report.

“In addition, changes in people’s economic incentives caused by federal tax and spending policies set in current law are expected to keep hours worked and potential output during the next 10 years lower than they would be otherwise,”  it added.

And it sees demographics – specifically, the retirement of the baby boomers - as likely to play an important role in driving the employment participation rate even lower.

 (The participation rate is the portion of working-age Americans who have a job or are looking for one, which is often viewed as a better measure of the strength of the economy than the headline unemployment rate.)

“The labour force participation rate has fallen 3 percentage points during the past several years, from 66% in the fourth quarter of 2007 to 62.9 percent in the fourth quarter of 2013,” continued the report.

“CBO estimates that about 1½ percentage points of that decline stems from ongoing demographic changes—primarily the ageing of the population, including the movement of baby boomers into retirement. (The oldest members of that group turned 62 and became eligible for Social Security retirement benefits in 2008).

“Because older people are less likely to work than younger people, the ageing of the population tends to lower the overall participation rate.”

A further one per cent of the drop in the labour-force participation rate since 2007 was down to fewer job opportunities, with a further one-half of a percentage decline the result of limited opportunities forcing people to quick the labour force permanently, said the study.

“The ageing of the population will continue to put downward pressure on the participation rate,” warned the CBO.

But what about the positive macroeconomic impact of the shale gas and tight oil booms?

Kevin Swift, chief economist and managing director of the American Chemistry Council, in a speech at last month’s 2nd ICIS Pan American Phenol-Acetone Conference, which took place in Houston, Texas, said that:

           An analysis by PwC found that US manufacturing companies could employ approximately one million more workers by 2025 due to benefits from affordable energy and demand for products used to extract natural gas.

           Citigroup released a study which examined the effects of the domestic energy supply revolution and found new production and associated activity will accelerate economic growth by 30-40 basis points. By 2020, the cumulative impact will boost real GDP by 2.0% to 3.3%, creating from 2.7 million to as high as 3.6 million net new jobs, and reduce (by 60%) the current account deficit to 2.4% of GDP.

           A Boston Consulting Group study uncovered a “tipping point” in cost- risk among seven key industries (computers and electronics, appliances and electrical equipment, machinery, furniture, fabricated metal products, plastic & rubber products, and transportation goods) and that as these industries “re-shore” to the US, the US will gain $80n to $120bn in added annual output and 2m-3m jobs.

The number of US chemical projects planned because of low-cost shale gas feedstock and energy is likely surge to a total of 150-175, representing well in excess of $110bn in investment, estimated Swift, in a 15 January article published by ICIS.

“The US is truly experiencing a new wave of investment in chemicals, with 54% of the current $93bn in planned new projects related to shale gas representing foreign direct investment,” he said.

Since around 2011, there had been 136 chemical projects announced as a result of the US shale gas boom, noted Swift. These included new projects as well as capacity expansions, some of which have been completed.

And so the $64,000 question for US - and also, perhaps, global - chemicals and polymers companies might end up being: “To what extent will the downside from an ageing population be offset by the positive impact the energy boom?

The answer will help determine to what degree all the US chemicals and polymer capacity additions will be absorbed by the domestic market versus how much will have to be exported.

These capacity additions look set to be substantial. For instance, US ethylene capacity will rise from around 26m tonnes/year in 2013 to approximately 34m tonnes/year in 2018, according to ICIS Consulting.

Read Paul Hodges’ Chemicals and the Economy blog
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By: John Richardson
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