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Wishful thinking dominates US government economic forecasts

Economic growth
By Paul Hodges on 28-Mar-2013

US pensions Mar13.png 350k Americans are now reaching the age of 65 each month until 2030. But according to government forecasts, this surge in the retirement population will have little impact on economic growth. That’s the view of the White House Council of Economic Advisers, which has just given its latest forecast for the impact of the ageing population on consumption:

“What will the aging population mean for consumption”? “More spending on health care and housing, less on education and transportation, but the changes will be small”.

This is the top forecasting body in the country. But plainly it hasn’t studied official Bureau of Labor Statistics data, which clearly shows that spending declines quite dramatically once people enter the New Old 55+ generation. As the blog discussed in October, this decline matters enormously, as household consumption is 71% of US GDP.

Even worse, is that this complacency means nothing is being done to plan for the impact of increased life expectancy. As the above chart from the Wall Street Journal shows:

• Life expectancy at age 65 is now 20.5 years for men and 22.7 years for women
• Yet only 13% of Americans are now ‘very confident’ they will have enough money in retirement
• 28% have ‘no confidence’ they will have enough money

So exactly how are these people going to maintain the same level of expenditure as when they were working?

Equally important, as we discuss in Boom, Gloom and the New Normal, is that more and more BabyBoomers have been leaving the Wealth Creator 25 – 54 cohort since 2000. This cohort does the ‘heavy lifting’ for economic growth as people settle down, have kids and build careers.

Instead, 82m Americans (26% of the population) now belong to the New Old 55+ cohort. This is a major change from the 21% level seen in the SuperCycle years from 1980 onwards. And by 2030, almost one third of the US population will be in the New Old.

New Olders only need to buy replacement products, as they already have most of what they need. They also have to focus on real ‘needs’, rather than ‘wants’, as their incomes decline as they reach retirement. So governments are fooling themselves, and everyone else, if they continue to assume that an ageing population will have no impact on economic growth.

Official forecasts for a return to strong SuperCycle levels of US economic growth are thus wishful thinking, not reality. Companies who believe them have a nasty shock ahead.