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

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

Ageing UK households’ impact on growth

My new post for the Financial Times FT Data blog highlights how household spending is very dependent on age.

Guest post by Paul Hodges| Jan 29 11:28 |
The UK’s ageing population is creating major headwinds for economic growth, data published last month by the Office of National Statistics shows.
The issue is simple: the ageing of the Baby Boomers means most UK households are now headed by someone more than 50 years old. On average, these households spend almost 20 per cent than less those headed by younger people. Consumer spending is around two-thirds of GDP, and so this ongoing shift in spending patterns is inevitably impacting the economic outlook.Two key facts provide the necessary context. One is that the majority of UK households have been headed by someone more than 50 years old since 2002. The second is that average household expenditure (in £2013) has now been in steady decline since 2006.

This chart highlights how these trends have developed:

UK household spending

The majority of UK households are now headed by someone aged over-50. In 2013, there were 14.6 million in this segment, compared to just 12.3 million headed by the under-50s. These older households spend less that younger ones. Average spend by those in the older age group was just £24k in 2013, compared to the £30k averaged by the under-50s. As a result, total spending by the larger segment of 50+ households at £354 billion was slightly less than the smaller, younger segment’s $368 billion.

These trends seem likely to continue. The ongoing decline in fertility rates continues to reduce the size of the highest-spending cohort, those aged 30-49. Their numbers have fallen from 9.8 million in 2000 to 9.6 million in 2013. At the same time, increasing life expectancy has led to an increase in the size of the 50-64 age group from 6.2 million to 7.1 million over the same period. Even more remarkably, the number in the very low-spending 75+ cohort has jumped by almost a quarter to 3.6 million, and their average spend is less than half of the 30-49 cohort.

Chart: Spending by age and category

This chart highlights how spending declines across all major categories past the age of 50. Peak spending takes place in the 30-49 cohort, when people are settling down, often starting a family, and seeing their careers and earnings develop. But after 50, spending reduces as the children leave home and their incomes decline as they enter retirement.

The two largest areas, housing and transport, see an immediate decline as people move into their 50s. In others, such as recreation and food & drink, the decline is delayed until they reach 65+. Overall, total spend by the 50-64 cohort averages 93 per cent of peak spending, whilst spend by the 65+ cohort is only three-quarters of the peak.

It is hard to see how these trends can be mitigated by policymakers. Today’s 65-year-olds now benefit from an extra decade of life expectancy compared to 1950, when they were born. But no political party is likely to go into May’s general election with a promise to immediately increase retirement age by 10 years to balance this.

The ONS data thus highlights the major challenge faced by policymakers, as they seek to restore economic growth to the SuperCycle levels seen when the Baby Boomers were in their prime spending years.

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

Ageing consumers from Chile to China need affordable, quality goods and services

Incomes Sept14The New Old 55+ generation is the key demographic for future consumer spending.  Their numbers are rising rapidly as global life expectancy has risen by 50% since 1950.

Over the same period, global fertility rates have halved.  So there will be fewer younger people joining the wealth-creator generation of 25 – 54 year-olds that has historically driven economic growth.

This is very bad news for anyone trying to sell ‘value-added’, ‘premium’ or ‘affordable luxury’ products and services, as a new study by AllianceBernstein makes clear:

“Vast cohorts of elderly people heading into the sunny uplands of their lives does not necessarily imply a bright future for investors”

The reason is highlighted in their chart above:

  • In the developed countries, workers typically reach peak income levels around the age of 45 – 54
  • As we note in Boom, Gloom and the New Normal, spending then reduces on joining the New Old 55+ generation
  • People already own most of what they need, whilst their incomes reduce quite sharply as they enter retirement

As AllianceBernstein highlight, the rise of the New Old means the outlook for consumer spending is even worse in emerging countries:

  •  ”In the emerging economies, people over the age of 45 are increasingly losing their jobs and getting pushed back down to the bottom of the pyramid
  • “And the older workers who are now losing their jobs typically have little or no savings, so instead of living out their lives comfortably, they are falling through the social classes
  • “We believe that this will have a profound impact on the spending power—and preferences — of older people from Chile to China”

Yet until recently, all the experts have tried to persuade us that emerging countries are just about to become ‘middle class’.  But this is only because they choose to define ‘middle class’ as meaning someone with as little as $10/day spending power.  In reality, anyone with this level of income in the developed world would be below the poverty line.

And the true picture is even worse for many older workers in emerging economies, as AllianceBernstein describe:

Unlike in the past, a university degree no longer assures middle-aged workers a bright future, because socioeconomic development is creating a generation of younger people with comparable degrees and better English skills, who are often willing to work for less money.

“Since people in emerging markets are likely to face financial insecurity as they grow older, luxury and leisure goods won’t be priorities. That’s why we think successful consumer companies will be those that understand how to grab a growing share of the older demographic by offering quality products at good value and services such as retirement insurance or cheaper healthcare.

For investors, ageing trends serve as a reminder that traditional research into company fundamentals must be complemented by an understanding of the underlying forces that are shaping the evolution of emerging markets.”

This is further evidence to support our analysis that consumer spending  in the future will focus on core needs such as water, food, health, shelter and mobility.

The New Old are the growth area in terms of numbers, but they won’t have much spare cash.  So affordability and ‘design to cost’ will be the key metrics for success over the next 20 – 30 years.

 

China Transformation webinar tomorrow

Moon cakesToday is Mid-Autumn Festival day in China, held to celebrate the harvest.  Traditionally it features the exchange of moon cakes filled with lotus paste and egg yolks, whilst children go to lantern parades.

But in recent years, it has also become synonymous with corruption.   Silver moon cakes, as pictured above, became a common gift for officials, as well as gold-adorned moon cake boxes.  And the corruption even extended into schools, as the Financial Times reports:

“For the past decade many Chinese parents have seen nothing wrong with giving teachers gifts to ensure that little extra for their child – maybe a seat at the front of the class, or a position as the Chinese equivalent of milk monitor. In the old days, lucky teachers might have scored a Louis Vuitton handbag or a day at the spa, but now most are lucky to receive grocery coupons or a popular brand of throat lozenges.

“Last year the official China Youth Daily reported that one university student managed to secure a pass in a major exam by plying her teacher with four boxes of top quality milk. But these days even the milk ruse won’t get past the government’s abstemiousness monitors.”

This year, things are indeed different.  Luxury goods manufacturers are seeing sales tumble.  Fine wine sales for government officials have collapsed by 90%, according to Decanter magazine, which goes on to add:

We can see a great shift here as the market moves from an era of government-led procurement and opportunistic profiteers to a market driven by genuine consumer consumption.’

Rooting out corruption is the No 1 priority for the new leadership, as highlighted on the official China Daily website, which lists all the leading officials who are now under investigation across the country.

At the same time, the government is collapsing the property bubble, which has become a severe threat to future economic stability.  As a result, consumption based on the property ‘wealth effect’ is also collapsing.

Companies and investors need to go rapidly up the learning curve on these new developments.  This is why we are holding our second China Transformation webinars tomorrow.  The webinar is free, and there are two options to attend – one timed for Asia /Middle East; one for Europe/Americas/Africa.

The main topics are:

  • How commodity trade fraud on metals in China could lead to a new global economic crisis
  • Problems faced by the polyester industry: Severe oversupply and a collapse of global cotton prices
  • The reform drive and what it means for future growth
  • The need for companies to reposition themselves as China’s economy changes

Please register here to join the discussion.

 

WEEKLY MARKET ROUND-UP
The blog’s weekly round-up of Benchmark price movements since January 2014 is below, with ICIS pricing comments:
Brent crude oil, down 7%
Naphtha Europe, down 6%. “Crude oil futures eased as rising supplies from Libya were matched with tepid demand caused by mediocre refining margins”
Benzene Europe, down 5%. “The key driver was the US market….With demand for benzene derivatives in Asia sluggish, in particular in styrene, this is pushing more material out of the region for export to the US.”
PTA China, down 3%. ”Operating rates were relatively low, as producers were running their plants to meet demand, to avoid a build-up in inventories”
US$: yen, down 1%
S&P 500 stock market index, up 10%
HDPE US export, up 13%. “Buyers are cautious and not willing to buy large volumes of material, waiting to see whether prices will move lower”

US, Japan consumer spend falls, deflation threatens Eurozone

D'turn 31Aug14

We are now two-thirds of the way through 2014, and critical decisions are looming for companies and investors.  Do they give central banks one more chance to stimulate growth?  And are they prepared to trust policymakers to avoid a major geopolitical crisis in the Ukraine?

Or do they decide that ‘enough is enough’, and that they should develop new strategies for the future?

As the chart above shows, chemical prices since 2013 in the blog’s benchmark portfolio confirm the sense that a ‘tipping point’ has been reached:

  • PTA prices in China are falling again due to weakness in cotton and the polyester chain (red)
  • Benzene prices in Europe are also falling due to weakness in downstream demand (green)
  • Brent crude oil (blue) and naphtha (black) are facing a “supply glut
  • Only US polyethylene prices appear strong (orange) but these are really nominal due to supply issues

This leaves only the financial markets showing strength.

In currency markets, the US$ is now moving higher versus the Japanese yen (brown).  July’s fall in Japanese consumer spend has severely dented hopes that Abenomics might succeed in overcoming the major demographic headwinds created by its ageing population.

Similarly, the S&P 500′s rise to the 2000 level (purple) seems likely to prove at least a temporary peak unless more stimulus is created.  The US also saw its consumer spending fall in July, with teenage apparel spend (15% of total retail) in a deep slump.  Thus more forecasters have recently lowered GDP estimates back below 3% again.

Meanwhile the Eurozone is coming closer and closer to outright deflation, with inflation just 0.3% in August.  Whilst even hosting the soccer World Cup couldn’t stop Brazil falling into recession in H1.

Plus, of course, in the background looms the growing geo-political crisis over the Ukraine.  Western leaders still assume that Russia is bluffing when it threatens “gas wars”.  And it will be too late to put in place proper emergency measures in mid-winter, if we then discover they were wrong.  Yet as Reuters reported last November, this is clearly part of Russia’s gameplan:

Moscow meanwhile had threatened retaliation for Kiev’s moves west, raising fears it could cut energy supplies in new “gas wars”.” 

In the next few weeks, companies will be finalising their Budgets for 2015-17:

  • Will they hope that more stimulus will finally return economies to SuperCycle growth levels?  And will they assume that the threat of ‘gas wars’ in the Ukraine will remain just a newspaper headline?
  • Or will they start to worry that current policies have opened ”fault-lines in a debt-fuelled ‘ring of fire’“, and that wishful thinking has obscured the risk to the 45% of Germany’s gas that is supplied by Russia?

Reorienting corporate strategy is never easy.   But doing nothing may well turn out to be the bigger risk as we move into Q4.

 

WEEKLY MARKET ROUND-UP
The blog’s weekly round-up of Benchmark price movements since January 2014 is below, with ICIS pricing comments:
Brent crude oil, down 6%
Naphtha Europe, down 4%. “Supply is long despite a wide-open arbitrage window to Asia”
PTA China, down 2%. ”Downstream demand in the polyester markets continued to be weak, with slower sales off-take”
US$: yen, down 1%
Benzene Europe, flat 0%.  “Downward pressure from raw materials and bearish sentiment in both Europe and Asia are weighing down on the European styrene market”
S&P 500 stock market index, up 9%
HDPE US export, up 12%. “August prices in the US market settled flat for the sixth month in a row…  Buyers who would previously have used PE for rigid containers starting to move to stand-up pouches, which use less plastic, and in some cases, steel containers rather than PE”

Oil consumption growth has slowed as prices have stayed high

BP energy Jul14

As promised yesterday, the blog looks today at the impact of today’s high prices on oil consumption growth.

As the chart, based on BP data shows, the ‘easy money’ policies of the central banks have only partially mitigated the impact of the oil price rally since 2009.  Consumption growth has not fallen to the 0.8%/year level since during the second oil crisis after 1979.  But nor has it regained the 1.7%/year level seen during the Boomer-led SuperCycle.  Then prices averaged $27/bbl in money of the day, and $41/bbl in $2014.

Overall, the big winners over the period since 2009 have been the traders (including the commodity desks at the investment banks) and oil producers.  Consumers have paid the bill.

THE TRADER VIEWPOINT
Oil proved a fantastic money-making opportunity from 2009 onwards.  A totally new trading product was developed titled ‘contango crude’.  This was crude that was stored in tanks all around the world to take advantage of pension funds’ sudden desire to buy crude on the futures markets.

For a cost of only $1/bbl per month, the early deals made total returns of $30/bbl – sometimes after as little as 3 months.  Storage companies also loved the story, and rushed to build more tanks to support it.

But today, the ‘contango trade’ is dead and buried.  Brent oil for supply next month closed Friday at $109.66/bbl.  The price for delivery in August 2015 was actually lower at $105.86/bbl.

In addition, the investment banks are now busy exiting the business, as their costs of capital are rising.  Many have either closed down their commodity trading businesses, or are reducing them in size.

THE PRODUCER VIEWPOINT
Producers have been laughing all the way to the bank.  They have kept a very careful eye on the broken Brent pricing mechanism, and have ensured that it has remained steady at around today’s levels.  That was not very difficult to achieve in the over-heated conditions of the past 5 years.  There are, after all, no laws to stop producers buying in distressed cargoes to avoid disturbing the market.

But whilst the influx of financial players added excess speculative demand, it also encouraged new production – most obviously in the US, but also around the world.  It takes time to finance and find new sources of supply.  But 5 years has proved more than long enough to create supply gluts in many major markets.

THE CONSUMER VIEWPOINT
High oil prices above $50/bbl have always led to recessions in the past.  The impact has been mitigated this time by the easy money policies and giant stimulus programmes.  But real incomes, adjusted for inflation, have mostly been falling in the West in recent years, causing higher oil prices to crowd out other more discretionary spending.

Equally, consumers have been looking to use more fuel-efficient vehicles, or to otherwise cut back on energy usage.  Again, as with exploration, these developments take some time to impact the market.  But they are now having an increasing effect in virtually every major market.

H2 may therefore prove to be the end-game for the post-2008 oil price market rally.  What happens next may not be pleasant, as the blog will discuss tomorrow.