The Daily Update - Demographics and Growth

Provisional estimates from the CDC on US births and fertility highlights the demographic challenges facing the US. The number of births declined 2% in 2018 to 3.788m, the fourth year in a row of decline and the lowest level for the past 32 years. The general fertility rate also hit a low falling 2% from 2017 to 59 births per 1,000 women aged 15-44 reflecting a decline in birth rates for women under 35.

Moreover, the total fertility rate, the number of babies a woman has over her lifetime, fell to 1.7 in 2018 which is below the replacement level (the level at which a given generation can exactly replace itself) of 2.1 babies. In fact, it has been generally running below the replacement level since 1971 and as the report notes ‘consistently below replacement for the last decade’.  This is important as without sufficient immigration ageing populations constrain labour force growth and in the absence of sufficient productivity gains this will constrain the growth rate of potential output.

John Fernald, Senior research advisor at the San Francisco Fed, noted in March review: ‘Demographics are the most important reason to expect slow future growth relative to its historical pace. By the middle of the next decade, the working age population (16-to-64 year olds) will be growing at a historically low pace, reflecting the aging of the baby boom generation. Of course, the working-age population does not translate one-for-one into employment; for example, many people over 64 do work, and participation trends are changing for other groups. Going forward, the Congressional Budget Office projects that the potential U.S. labor force will grow at about a 0.5% pace. This is almost a percentage point below its average pace over the past half century.’ Indeed, he also notes that they estimate sustainable trend rate of GDP growth at 1.7% which ‘reflects assessments of the labor force (which determines potential hours worked) and productivity (most broadly, real GDP per hour worked)’.

To put this in context, the US has one of the better demographic profiles compared to countries like Germany and Japan.  UN data estimates that the average age of the population in the US will increase from 38 to 42 years between 2015 and 2050 which while ageing is still better than Japan and Germany: the average age is estimated to increase from 47 to 53 years and from 46 to 51 years respectively.  However, according to the United Nations, the entire populations (not just those of working age) of 48 countries or areas in the world are expected to decrease between 2015 and 2050.

For us, this reinforces our view that we are in an era of low growth and the neutral rate of interest will remain low underpinning interest rate expectations at the long end of the curve.  Thus, the hunt for yield seems set to continue and for us the positive yields offered on US dollar denominated debt from creditor nations looks to be a compelling opportunity.

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