US economy’s demographic dividend is fast turning into a deficit

Economic growth

SHARE THIS STORY

My new post for the Financial Times FT Data blog discusses how the ageing of the US population is creating major headwinds for the economy.

Guest post by Paul Hodges| May 06 13:45 |

US spend May15Demographic change is creating major headwinds for the US economy, as confirmed by its disappointing first quarter GDP growth of 0.2 per cent.  Consumption accounts for around 70 per cent of US GDP, and new data on household spending from the US Bureau of Labor Statistics (BLS) demonstrate how the ageing of the US population is creating major structural change in the economy.  One key factor is that there are more older people than ever before, due to a combination of the ageing of the US baby boomer generation (those born between 1946 and 1964) and increasing life expectancy.

Older people tend to spend less, as they already own most of what they need and their incomes decline as they enter retirement.  Equally important is the collapse that has occurred in US fertility rates since the peak of the baby boom.  These have nearly halved from the 3.33 babies/woman level of the mid-1950s to just 1.97 babies/woman today, below the level required to replace the population.  As a result, the size of the 25-54 age group, historically the main wealth creators, has plateaued in the US.

The above chart highlights how these two developments have impacted spending patterns between 2000 and 2014:

  • In 2000, there were 65m households headed by someone in the wealth creator (25-54) cohort, almost double the 36m in the 55+ cohort
  • But from 2001, the boomers began to move into the 55+ cohort, causing its numbers to rise by more than a third, to 52m by 2014. Meanwhile, the wealth creator cohort plateaued at 66m.
  • These trends are likely to continue. There are few signs of any increase in fertility rates, while the average 65-year old American baby boomer can now expect to live for another 20 years

These trends have clear implications for the US economy, as this chart confirms:

US spend2 May15

  • Consumption peaks in the 45 to 54 age-group, where the average spend was $63k in 2014
  • 35 to 44 year-olds were close behind, with annual spending of $60k, while 25 to 34 year-olds spent $48k
  • By comparison, 55 to 64 year-olds spent $56k, and those aged over 65 spent just $43k
  • The only major area of spending that increases after 55 is healthcare, which rose from $4783 in the 45 – 54 age group to $6001 for the over-65s

One positive factor is that spending by older Americans increased between 2000 and 2014 in real terms (at 2014 prices) from $43k to $48k, as the first chart shows.  But this was still a 15 per cent reduction against the $57k spent by the wealth creators.  On the negative side, spending by the wealth creators declined by 5 per cent over the same period from $60k to $57k.

The BLS data highlights how baby boomers’ spending when they were in the wealth creator cohort created a demographic dividend for the US economy. But now, the ageing of the boomers and the collapse of fertility rates is steadily turning that dividend into a demographic deficit.

Of course, this is only bad news from the perspective of economic growth. Most Americans are highly delighted at having gained an extra 10 years of life expectancy since 1950. Their main worry instead, given today’s low interest rates, is how to finance their extended retirement.

Paul Hodges is the co-author of Boom, Gloom and the New Normal: How the Western Baby Boomers are Changing Demand Patterns, Again. www.new-normal.com

PREVIOUS POST

US Marcellus gas output trebles as drilling rig count halves

07/05/2015

Simple stories aren’t always true.  That’s certainly the case with ...

Learn more
NEXT POST

US interest rates likely to move higher sooner, not later

11/05/2015

The Great Unwinding of policymaker stimulus began last August with the collapse...

Learn more
More posts
Global chemical industry – key trends for success in today’s New Normal
02/08/2020

The chemical industry is the best leading indicator for the global economy. On Friday, I had the pri...

Read
Oil prices signal potential end to the V-shaped recovery myth
26/07/2020

Oil prices have moved into another ‘flag shape’ – which previously provided critic...

Read
Bankruptcies now the key risk as hopes for V-shaped recovery disappear
19/07/2020

Governments, financial markets and central banks all originally assumed the Covid-19 pandemic would ...

Read
Merkel warns of need to prepare for No Deal Brexit
05/07/2020

Most people missed the fact that last Tuesday was the last possible date to delay the UK’s exi...

Read
World moves from Denial to Anger, as the Paradigm of Loss moves forward
07/06/2020

I have been warning about the Covid-19 risk since early February, and in April suggested here that: ...

Read
The New Normal for global industry
31/05/2020

The global chemical industry is the third largest sector in the world behind agriculture and energy,...

Read
Debt, deflation, demographics and Brexit set to challenge London house prices
17/05/2020

London property websites haven’t used the word “reduced” for many years. But it...

Read
The bill for two decades of doomed stimulus measures is due
03/05/2020

The Financial Times kindly made my letter on the risks now associated with central bank stimulus the...

Read

Market Intelligence

ICIS provides market intelligence that help businesses in the energy, petrochemical and fertilizer industries.

Learn more

Analytics

Across the globe, ICIS consultants provide detailed analysis and forecasting for the petrochemical, energy and fertilizer markets.

Learn more

Specialist Services

Find out more about how our specialist consulting services, events, conferences and training courses can help your teams.

Learn more

ICIS Insight

From our news service to our thought-leadership content, ICIS experts bring you the latest news and insight, when you need it.

Learn more