US GDP growth is slowing, again, as the chart of the Atlanta Federal Reserve’s “GDP Now” forecast shows:
Forecast Q1 growth has slipped to just 0.6% from an initial 3.4% at the end of January
Consensus economic forecasts are still much higher, but even they have fallen to 1.7% from 2.2%
The decline has been accelerating, due to disappointing data from a range of key indicators. as the Atlanta Fed note:
“The forecast for first-quarter real GDP growth fell 0.4% after the light vehicle sales release from the U.S. Bureau of Economic Analysis and the ISM Non-Manufacturing Report On Business from the Institute for Supply Management on Wednesday and 0.2% after the employment release from the U.S. Bureau of Labor Statistics and the wholesale trade release from the U.S. Census Bureau this morning. Since April 4, the forecasts for first-quarter real consumer spending growth and real nonresidential equipment investment growth have fallen from 1.2% and 9.7% to 0.6% and 5.6% respectively.”
Worryingly, therefore, we seem to be repeating the usual pattern of disappointment – with New Year optimism being followed by harsh reality – as the US Federal Reserve’s deputy chairman, Stanley Fischer, noted nearly 3 years ago:
“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.”
The key issue, of course, is that policymakers have still not accepted that the US economy is inevitably moving into a low-growth mode, due to its ageing population. As the Chief Economist of the Bank of England, Andy Haldane noted recently, the impact of:
“Demographics in mainstream economics has been under-emphasized for too long”
There is little sign of the new policies that are urgently required to take account of the changes that have taken place in life expectancy and fertility rate. As a result, forecasts continue to be made on the basis of wishful thinking at the start of each New Year. As I noted in December:
□ Increasing life expectancy means people no longer routinely die around pension age. Instead, a whole New Old generation of people in the low spending, low earning 55+ generation is emerging for the first time in history. The average western BabyBoomer can now expect to live for another 20 years on reaching the age of 65
□ Fertility rates in the developed world have fallen by 40% since 1950. They have also been below replacement levels (2.1 babies per woman) for the past 45 years. Inevitably, therefore, this has reduced the relative numbers of those in today’s Wealth Creator cohort, just as the New Old generation is expanding exponentially
Friday’s US jobs numbers confirmed this obvious truth, as the second chart shows:
□ Less than 2/3rds of the US over-16s population now have jobs. The current percentage of 62.9% is back at 1978 levels – when the median age was 30 years, compared to today’s 38 years – and so relatively more young people were still in school and college
□ The picture for men is particularly worrying, with just 68.9% at work, an all-time low. The dcline seems to have accelerated since the Finanical Crisis began, with the participation rate falling from 73.2% in 2007
□ The percentage of women working is also still in decline, although at a slower rate. It is at 57.2% today compared to the 60% peak in 1999 before Boomer women began to retire
Even more worrying is the data shown on the 3rd chart, which highlights the changes in real wages, adjusted for inflation, since records began in 1979:
□ Average earnings in 2016 were only just higher than in 2009, at $347/week versus $345/week
□ Average earnings for men at $381/week are well below the peak of $402/week in 1979
□ Only women’s earnings are moving in the right direction, with 2016 at a new high of $312/week
□ But, of course, this highlights how women’s earnings still average only 82% of men’s earnings
It is no great surprise that US and global GDP continue to disappoint, given this evidence from the jobs market. And nothing will change until policymakers accept that today’s ageing populations require completely new policies.
Employment income is critical for most Americans and for the US economy. The above chart shows how the key factor – the participation rate – has changed since records began in 1948. It shows July data, to avoid the need for seasonal adjustment, split by Men, Women and Total:
□ Last month’s Total rate was 63.4%, versus the peak of 68.1% in July 1997, and was back at the 1977 rate
□ The Men’s rate was 70.3%, versus the peak of 88.7% in July 1948, equal to the 2014 – 2015 all-time lows
□ The Women’s rate was 56.9%, versus 1999′s peak of 60.3%, and was back at 1988′s level
This highlights how the workforce is now missing 12m people, due to the fall in the participation rate. 173m would have been working today if the peak rate of 68.1% had been maintained. Instead, only 161m were working. Inevitably, therefore, US GDP continues to disappoint.
Yet policymakers ignore this critical fact. Instead, they pretend that monetary policy can somehow fill the gap created by these missing 12m people. It would be nice if true, but common sense tells us this is wishful thinking.
The chart also highlights the key reasons why (a) the economy boomed during the Boomer-led SuperCycle and (b) is now seeing slower growth:
□ The key issue driving the SuperCycle was the dramatic growth in female BabyBoomer employment. Only a third of women were working in the early 1950s, but the rate then nearly doubled as a paradigm shift took place in the status of working women. As a 2005 National Bureau of Economic Research Study noted – they were no longer “perceived as secondary earners within the family”
□ Instead, women began to routinely return to the workforce after having children. This not only added to total employment, but also led to a rise in their earnings relative to men – from 62.3% in 1979 to 81.8% in Q2 today. In turn, this phenomenon of dual-income households (for the first time in history) turbocharged economic growth
□ This growth in female employment also helped to counter-balance the ongoing loss of higher-paying, mostly male, jobs in manufacturing, which were being steadily replaced by technology. More than a quarter of US employees worked in manufacturing in 1970, but this percentage had fallen to only one in ten by 2010.
□ US manufacturing employment fell from 19.6m in 1979 to 13.7m in 2007 – but the majority of this loss only took place after 2001, as companies realised the potential of IT-led automation
These are not difficult trends to reverse, if policymakers were willing to do this. They would, however, involve initially difficult conversations with voters – which is why neither Presidential candidate are likely to raise the key issues.
US GDP COULD RESUME GROWTH IF POLICYMAKERS ADDRESSED THE DEMOGRAPHIC ISSUES
The US is not like Japan, where the population is now actually falling. Instead, its population has been growing quite strongly. There were 267.8m people in July 1997 when the total participation rate peaked, compared to 324m in July.
But the demographics of the population continue to change quite significantly:
□ 15% of the polulation is currently aged 65 or over, compared to 11% in 1979, whilst life expectancy at age 65 has risen to 84.3 for men and 86.6 for women. Yet there has been no discussion about raising the retirement age, even though the Social Security trust fund will be exhausted within 13 years
□ Similar myopia dominates the racial make-up of the workforce. Bureau of Labor Statistics data shows that unemployment is far higher amongst Blacks (11.3%) and Hispanics (7.4%) than for Whites (5.3%). Even more disturbing is that Blacks earn only 80% of the average wage, and Hispanics just 77%, compared to Whites at 103%
□ This matters because Blacks are 12% of the 18+ population, and Hispanics are 16% – and, of course, these percentages are rising all the time as 92% of all US population growth since 2000 has been in Minority communities
These problems won’t go away just because policymakers choose to ignore them. They will simply get worse, and make it even harder to reach an agreed solution. Historians will not be kind when they come to discuss this failure.
WEEKLY MARKET ROUND-UP
My weekly round-up of Benchmark prices since the Great Unwinding began is below, with ICIS pricing comments:
Brent crude oil, down 59%
Naphtha Europe, down 60%. “Naphtha market still bearish”
Benzene Europe, down 53%. “Spot numbers drift lower. Weak outlook for oil/energy pricing”
PTA China, down 42%. “G20 shutdowns unconfirmed, producers remain in discussions with authorities”
HDPE US export, down 33%. “Weak demand for PE in China seemed to continue in the near term, hence the price gain might be limited”
S&P 500 stock market index, up 12%
US$ Index, up 18%
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 |
Demographic 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:
- 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
“The big picture remains unchanged. Four years after the recession officially ended, per capita output and income have yet to return to their pre-crisis highs. The recovery still ranks as the worst since World War II. And despite the modest acceleration in the past two quarters, the recovery shows little sign of gaining momentum.”
The above isn’t a blog forecast about the likely economic impact of the West’s transition to the New Normal. It is instead the conclusion of Thursday’s main story in the Wall Street Journal, reporting that Q2 GDP grew just 1.7%. The Journal also warned:
“There are some signs the overall economy’s acceleration could be short-lived. More than 24% of the quarter’s growth came from an increase in inventories—a buildup that is unlikely to be repeated and could even be erased in subsequent data revisions. Consumer spending, which has been the backbone of the recovery recently, grew at a slower pace in the second quarter, with Americans cutting spending on hotels and restaurants—a possible indication families are pulling back on discretionary items. It is also possible federal-government agencies may make more cuts in coming quarters.”
This is yet further confirmation of the way that the blog’s views on the economic outlook are now becoming mainstream consensus thinking. The pity is that the demographic rationale for these developments is still not being properly discussed. Policymakers seem most unwilling to accept there can be no return to the SuperCycle period of constant growth. As a result, companies and the media continue to be given the wrong outlook.
The chart above shows the most likely outlook for GDP growth and interest rates. It focuses on the average 5 year percentage growth in the critical Wealth Creator generation of 25 – 54 year-olds (blue column) as the key dimension. When this cohort is growing fast, then interest rates (black line) and GDP (red) also increase quickly. When growth is the cohort slows, then growth and interest rates also slow.
The reason is obvious. A sustained surge in the number of Wealth Creators (as happened from 1971 as a result of the 1946-64 US BabyBoom) means that demand starts to increase faster than supply. So interest rates need to rise, to allow the price mechanism to ration available supply. Then once growth in the number of Wealth Creators starts to slow, supply begins to catch up with demand, and so interest rates can fall back to normal levels.
If President Obama decided to add the blog to the shortlist to become the next Federal Reserve Chairman, this is the one chart it would take to the interview. Unlike most economic models, it has been accurate for the past 50 years. And its ability to continue to forecast the outlook depends only on knowing how many people will be entering or leaving the 25 – 54 age group – something which is very well understood.
Latest benchmark price movements since the IeC Downturn Monitor launch on 29 April 2011, with ICIS pricing comments below:
Naphtha Europe, down 20%. “Petrochemical demand for naphtha is higher than a couple of weeks ago.”
PTA China, down 17%. “Chinese domestic PTA prices were relatively softer than import prices because of abundant supply and weak spot requirements from end-users”
HDPE USA export, down 15%. “Global demand is weak, with buyers purchasing only as needed”
Brent crude oil, down 13%.
Benzene Europe, down 3%. ”Prices in July reached a yearly low on ample availability and weak derivative offtake
US$: yen, up 21%
S&P 500 stock market index, up 25%
The above chart from the Wall Street Journal highlights the major change that has already taken place in the US economy as it transitions to the New Normal. The black line shows the 10-year average growth for US GDP since 1980, which has halved since 2008 because:
• GDP grew at an average of 3.1% from 1983 – 2007 in the Boomer-led SuperCycle
• Even more importantly, there were only 16 months of downturn during this period
• And these were immediately followed by a recovery based on pent-up demand
• But since 2008, however, growth has only averaged 1%
This change is even more startling given the $tns of stimulus/liquidity provided by the Federal Reserve and the government. They thought this would turbo-charge a quick recovery but failed to recognise that it is demand, not liquidity, that drives economies. 26% of the US population are now >55 years, and 10k/day reach retirement age of 65 years. Older people mainly need only replacement products, and thus the concept of ‘pent-up demand’ is no longer relevant.
Equally, it is very hard for the US economy to grow if China is rebalancing and Europe close to recession. China’s real Q1 GDP growth was probably similar to the 4% growth in electricity consumption and in oil demand. The reported figure of 7.7% is simply a target level for guidance to local governments, as premier Li has emphasised in the past.
The key question for the US is, of course, what happens next? The detail of the Q1 GDP report confirmed that consumers have been busy replacing older cars and appliances, and so future growth in this crucial area will probably now plateau. Worryingly, companies seem to have been over-optimistic on demand, as inventories rose quite sharply. And there were already signs that corporate capital investment is already starting to decline.
Certainly the evidence from chemical markets, and Q1 corporate results, gives little sign that a quick return to SuperCycle years can be expected. Instead, the cost of paying down the debt caused by the stimulus efforts will be a burden for decades to come.
Benchmark price movements since the IeC Downturn Monitor’s April 2011 launch, and latest ICIS pricing comments are below:
Naphtha Europe, black, down 26%. “Asian petchem market is already set to receive over 0.5MT of deep-sea naphtha supply in June
PTA China, down 23%. “Subdued buying activity in the wake of weak China economic data and volatile commodity markets”
Brent crude oil, down 18%
HDPE USA export, down 18%. “Traders saying prices are expected to fall further”
Benzene NWE, up 5%. “Dynamic of the market started to reverse in midweek”
S&P 500 stock market index, purple, up 16%