US Economy Returns To Weak Growth On Demographics

Picture1By John Richardson

THE US is a deeply politically divided country to the point where the divisions are having a profound effect on consumer confidence. As the New York Times writes:

Among Republicans, the University of Michigan consumer expectations index was at 61.1 in October, the kind of reading typically reported in the depths of a recession. Confident that Mrs. Clinton would win, Democrats registered a 95.4 reading, close to the highs reached when her husband was in office in the late 1990s and the economy was soaring.

By March, the positions were reversed, with an even more extreme split. Republicans’ expectations had soared to 122.5, equivalent to levels registered in boom times. As for Democrats, they were even more pessimistic than Republicans had been in October.

Just imagine, therefore, what could happen if President Trump fails on tax reform and infrastructure spending. Failure on both look to be distinct possibilities following the collapse of his healthcare reforms. By the third quarter of this year, declining consumer confidence amongst all voters might be enough to by itself push the economy into a downturn, if not a recession.

US Q1 GDP Growth Could Be Just 0.6%

The hard data on the economy should also be setting alarm bells ringing. Questions need to be asked about what I think is the false notion that the US is in the midst of a strong, sustainable economic recovery.

US-GDP-Apr17

For example, US GDP growth is slowing, again, as the above chart of the Atlanta Federal Reserve’s GDPNow forecast shows. Its forecast Q1 growth has slipped to just 0.6% from an initial 3.4% at the end of January. Consensus economic forecasts are still much higher, but even they have fallen to 1.7% from 2.2%;

The Atlanta Fed writes that this the result of a succession of disappointing recent data releases

The forecast for first-quarter real GDP growth fell 0.4% after the light vehicle sales release from the US Bureau of Economic Analysis and the ISM Non-Manufacturing Report On Business from the Institute for Supply Management on Wednesday and 0.2% after the employment release from the US Bureau of Labor Statistics and the wholesale trade release from the U.S. Census Bureau this morning. Since April 4, the forecasts for first-quarter real consumer spending growth and real non-residential equipment investment growth have fallen from 1.2% and 9.7% to 0.6% and 5.6% respectively.

What’s going wrong? It is demographics.

AgeingSpending

  • As the Babyboomers reached working age in the 1960s and 1970s they increased US labour supply, leading to a surge in economic growth and higher interest rates in response to higher inflation. Too much demand was chasing too little supply.
  • Demand received a further boost from greater numbers of women joining the workforce for the first time.
  • But because the Babyboomers have themselves had few too-few children, the demand dividend of all those extra babies in now turning into a demand deficit. The US Federal Reserve finally woke up to these facts last October when it released a research paper on demographics. As The Washington Post wrote at the time, about the research paper: Boomers are by far the largest American generation on record, with 76 million people born between 1946 and 1964. They are substantially more numerous than the 47 million members of the Silent generation that preceded them, as well as the 55 million Gen Xers, the 66 million millennials and the 69 million post-millennials, according to Pew Research Center.
  • Today’s demand deficit has led the Fed researchers to conclude that demographic changes account for a 1.25 percentage point decline in annualised economic growth since 1980 – about half of the total decline since that year.
  • And now that ever- greater numbers of the Babyboomers are entering their retirement years with not enough young people replacing them, too much supply is chasing too little demand – not only in the US but across the West in general. As the chart above indicates, as people get older they spend less because a.) They are living on pensons, and so reduced incomes, and B). They already own most of what they need. This explains today’s global oversupply of manufacturing, low returns on investment and persistently low inflation. It also of course explains why years of low interest rates have failed to get Western economies going again.

Donald Trump needs to tackle demographics

Years of stagnating middle class income levels led to the willingness to support a radically different alternative, and that alternative was of course Donald Trump. He essentially won the election because of the failure by mainstream politicians to address the issue of ageing populations.

Now his challenge is, I said at the beginning, is to avoid disappointing his supporters and adding to the already negative fundamentals. The last thing the US economy needs, which is 70% driven by consumer spending, is a decline in consumer confidence.

Here we come in full circle. He will only avoid disappointing his supporters, and he will only win over the critics and the undecideds, if he addresses America’s demographics challenges.

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