“Year after year we have had to explain from mid-year on why the global growth rate has been lower than predicted as little as two quarters back.”
That was the comment, last August, from the new deputy chairman of the US Federal Reserve, Stanley Fischer. This year, he won’t have to wait until mid-year to start the explanations, as yesterday’s US GDP report showed it had risen just 0.2% in Q1. In fact, the underlying position is even worse, as the chart above shows:
- It shows the quarterly change in US GDP (blue), versus the change in US inventories (red)
- An inventory drawdown normally boosts GDP in the next quarter, as businesses restock
- Similarly, an inventory build normally reduces GDP in the next quarter, as businesses destock
- Q1 inventories actually rose by 0.7%, which will reduce potential Q2 GDP growth
The actual GDP figure was no surprise, given the Atlanta Fed’s GDPNow forecast a month ago. But this had just given more time for the excuses to be prepared, of “the dog ate my homework” variety:
- The arrival of winter meant it was often very cold during Q1, particularly in Northern parts of the US
- Housing markets continued to turn in a weak performance
- Job growth stalled as the shale bubble ended
- Plus there were new excuses such as the strike in the W Coast ports and the rise in the US$
It is hard to understand why anyone pays any attention to these excuses. It is, after all, more than 6 years since the financial crisis began. If policymaker’s stimulus policies were going to work, they would have worked by now.
The reality is that the US has an aging population, as does most parts of the world. One simple fact explains how yesterday’s demographic dividend has become today’s demographic deficit. As the above chart shows, there are now more people over 65 in the world than aged under 5. In 1950, by comparison, there were 3x as many under-5s.
Key for the US economy is the lack of babies to replace the declining demand of the ageing BabyBoomers. But for some reason best known to themselves, policymakers simply refuse to accept this could impact economic performance. Yet consumption is more than 2/3rds of the US economy.
I wonder, sometimes, if these intellectually brilliant men and women simply lack common sense? It seems rather obvious, after all, that older people will consume less: they already own most of what they need, and their incomes decline as they enter retirement. The issue of retirement is critical, as due to the miracle of longer life expectancy:
- A male American can expect to live for 19.3 years on reaching the age of 65
- A female American can expect to live for 21.6 years after reaching 65
- US Census data shows there were already 43.1m Americans aged 65 and over in 2013
- This means they were 15% of the total population – and the percentage is rising every day
Would we rather have growth, or live for an extra 20 years compared to our grandparents? I often ask this question at conferences, and the voting is always unanimous in favour of living longer, as one would expect.
Hopefully one day, this simple message will get through to policymakers. I fear, however, they prefer to be willfully blind to its implications for the economy.