Monday, December 19, 2016

Millennials Can't Make Up for Cresting Wave of Baby Boomers

Donald Trump has pledged to grow the American economy by 4 percent annually. That’s a lot easier said than done. The average growth rate in the U.S. has been below 2 percent for the last decade. In fact, since 2001, annual GDP growth has averaged just 1.85 percent.

Since 2001, GDP has reached at least 3 percent in just two years: 2004 (3.8 percent) and 2005 (3.4 percent). In every other year, through 2015, GDP failed to crack 3 percent, a number that was once considered customary.

Historically, from 1947 through 2016, the annual GDP growth rate in the US has averaged 3.23 percent.

Aging economies simply do not grow as fast as younger, emerging economies. All of the low-hanging fruit has already been picked in the U.S. and all the available juice has been extracted.

This failure to grow the economy at its historical average is not because presidents Bush and Obama didn’t want more growth, or because the two parties in Congress thought the status quo was good enough. They are simply confronting forces largely beyond their control.

If it were as easy as simply "deciding" to grow the economy by 4 percent or more each year, then all presidents would do it. However, it doesn't work that way.

The Baby Boomers were once the economic engine that drove the U.S. economy. However, those days are now over.

Defined as the generation born between 1946 and 1964, the Boomers comprise nearly a quarter of the US population — or more than 75 million people. They were the largest generation in American history, which made them an unprecedented economic force. However, they are now largely retirees… and dying.

Demographic research shows that people overwhelmingly begin to spend more in their 30s through their 40s. They are typically well established in their careers by that point and are in the midst of buying homes and furnishing them. They are also creating families, which also incurs deeper spending. As people progress in their careers, their pay typically rises, which increases spending power.

According to the work of demographic trend expert and economic researcher Harry Dent, individuals typically hit their peak spending between the ages of 46 to 50. However, once a person reaches the age of 50, spending begins to fall. After the age of 60, the decline in spending is significant, falling below that of even young people in the 18-22 demographic.

Since the last of the Boomers were born in 1960, the final wave of them won’t retire until 2027 — a decade from now. Yet, their absence from the workforce is already being widely felt across the economy.

The labor force participation rate, which indicates the share of the working-age people in the labor force, stood at 62.7 percent in November, according to the Bureau of Labor Statistics (BLS). The figure has been stuck below 63 percent since the start of 2014. When the Great Recession officially began in December 2007, the proportion of adults who either had a job or were looking for one stood at 66 percent.

What all of this means is that a whopping 95 million Americans were not in the labor force as of November, which is a new record. The number of people in the labor force (which the BLS classifies as employed or unemployed, but actively looking for a job) was roughly 159 million.

To put this in simple terms, there are 159 million U.S. workers and 95 million non-working adults. In essence, there are just 1.67 workers for every non-worker.

The number of Americans in the labor force has continued to fall partly because of retiring Baby Boomers and also because fewer workers are entering the workforce.

The Congressional Budget Office says about half the decline is due to the aging population. Roughly 10,000 Baby Boomers turn 65 every day, and many of them retire.

Millennials surpassed Baby Boomers this year as the nation’s largest living generation, according to population estimates released by the U.S. Census Bureau. This makes sense; given their age, the Baby Boomers are a shrinking generation.

Millennials, defined as those born between 1981 and 2002, now number 75.4 million, surpassing the 75 million Baby Boomers (Generation X, those born from 1965 to 1980, totals just 65 million).

However, the Millennials are not the same economic force as their parents and grandparents. They are hindered by large student debts and low-paying jobs, even among those with college degrees. Think about how many young college grads are working as baristas, bartenders, servers or nannies, for example. These are the types of jobs that don’t set them up for a successful career, financially at least.

Low earnings at the start of a career typically hamper earnings throughout one’s career. Salary is often dictated by history, as well as experience. In many cases, Millennials don’t have much of either.

The U.S. has experienced an explosion of college loan debt, with more than 43 million Americans holding roughly $1.2 trillion in student debt obligations, which has more than doubled in just the last eight years.

Given their high debts and low-paying jobs, these young people cannot come up with the downpayment for a home, and many don’t feel they have enough income to get married and start a family. The delay in starting families will likely lead to smaller families, which will slow population growth and, ultimately, economic growth.

Consequently, just 36 percent of Americans under the age of 35 own a home, according to the Census Bureau. That's down from 42 percent in 2007 and it's the lowest level since 1982, when the agency began tracking homeownership by age.

So, demand is falling due to the aging Boomers and the Millennials are not in a position to pick up the slack. Additionally, older people aren’t more productive; they’re less productive.

Bureau of Labor Statistics data indicates that U.S. productivity growth from 2010-15 averaged just 0.4 percent per year, down from 1.9 percent during the 1990-2010 period and way down from 2.6 percent during the 1950-1970 period. Historically, productivity gains have been an important engine for wage increases as well as GDP growth.

Economists argue about why exactly productivity has declined, but many assert that game-changing new technologies — such as electricity, cars or personal computers — have run their course. The IT boom of the late ‘90s and early 2000s has also lost some steam as that technology has been widely adopted. Another problem is the lack of education and training for the jobs of the 21st Century.

This slump in productivity, which measures hourly output per worker, is a big deal for the economy and for workers. As Fed Chair Janet Yellen has said, “Productivity growth is the key determinant of improvements in living standards.”

With all of the above in mind, there's not a snowball’s chance in hell that the U.S. economy will grow at 4 percent per year under Trump, much less the 5-6 percent growth he assured voters during the October presidential debate.

The decline in demand and spending by the Baby Boomers should not be under-appreciated or under-stated. That, in combination with the financial struggles of the Millennials, are at the heart of our slow economic growth and there are no indications that will change in the coming years.

Then there’s the matter of our enormous debt, which is also hindering economic growth. But I’ve covered that many times in the past (such as here, here, here and here) and it will have to be a topic for a future story.

Suffice to say, debt growth is exceeding GDP growth, and that is highly problematic.

1 comment:

  1. "Defined as the generation born between 1946 and 1964, the Boomers ... are now largely retirees… and dying."


    "Additionally, older people aren’t more productive; they’re less productive."


    Just Kidding. Nice blog. A google search for long-term decline of US economy brought me to your US Economy Trapped In Long Term Decline (9 Sept 2015)

    I thought your stats were interesting, comparing growth rate averages for 1947-2015 to 1973-2015, and listing "the top five years of GDP growth". I look at these numbers all the time (being retired, I have plenty of time for that) but you showed me two ways of looking that I never saw before. Very effective.

    So I checked out some of your newer posts. I like what I read.

    RE Donald Trump's 4% growth target, I'm thinking maybe he is looking at the 95 million who are not working, and the "1.67 workers for every non-worker" ratio, and thinking he can grow output a lot if he can create jobs enough and draw enough people into the labor force. That would be great. I seem to find a lot of economists saying such labor force growth can never happen but I think they are doing econ just to satisfy their political views.

    My view, it is private sector debt that hinders growth. My view, we have all that debt because policymakers think using credit is good for growth but accumulated debt is harmless. So they make policies to encourage borrowing and the use of credit, but do not make policies to accelerate the growth of private debt. So our debt accumulates.

    I know, I know, you didn't ask. I'm just trying to show you how productive my mind is, and that I ain't dead yet. :)