One of our investing themes here at Tematica is the Aging of the Population. The first baby boomers are turning seventy this year, with another 1.5 million joining the 70+ crowd every year for the next 15 years. That means that we will be seeing record numbers of workers leaving the labor pool, which has a big impact on the economic growth potential.
The growth of GDP is a function of total hours worked in an economy, (which is itself a function of how many people are in the labor pool) and productivity.
This week the fourth quarter 2016 productivity numbers were released and they revealed that worker productivity increased last year at the slowest pace since 2011. With hours worked rising just under 2 percent combined with productivity rising about 0.5 percent per year, the best the economy can muster is roughly 2.5 percent growth. In order to get that much higher, we need people to work more hours, which is unlikely given the aging demographics or productivity needs to rise.
Increasing productivity isn’t something that can be done all that quickly, regardless of who is in the White House or which party dominates in DC, which we’ve talked about earlier in this post. We also discuss in that post how fertility rates in the U.S., and in much of the developed world, are declining to levels well below replacement rates, which means that were the nation to be left in isolation, the population of the country would decline over time. A declining population means fewer workers which leads to weaker growth prospects, not to mention a shrinking taxable base.
So what’s an economy to do? Pew Research just answered that question.
“Without immigrants, Pew projects the total U.S. workforce population — those ages 25 to 64 — would fall from 173.2 million in 2015 to 165.6 million in 2035. But if the current rate of both legal and unauthorized immigration remains steady, Pew projects that the number of working-age adults will rise to 183.2 million in 2035.”
They further found that,
“…the largest portion of the working population, people born in the U.S. to parents who were also born here, is shrinking. According to Pew, this segment of the workforce is expected to fall from 128.3 million people in 2015 to 120.1 million by 2035. U.S.-born workers will go from accounting for 74% of the workforce to just 66% of it.”
While concerns over terrorism are completely valid, the basics of economics tell us that to get this economy back to more historically typical rates of growth, the nation needs to augment its workforce, particularly as the largest generation in American history moves into retirement. This shift is a double-whammy in that not only is the economy losing large numbers from the workforce, but those retirees tend to spend a lot less in their sunset years, where they are more likely to shed assets than acquire more: grandpa and grandma are more likely to be downsizing their homes and less likely to be buying new cars today than they were 20 years ago! While our Aging of the Population investment theme is a tailwind for many companies serving that older cohort, companies that are tied to consumer spending are likely to feel the headwind.
Bottom Line – all the growth-positive legislation that could possibly be issued out of D.C. cannot get around the simple math that the more the pool of labor grows, the greater the potential for the economy.