Do demographics point to slower growth and slower recoveries?

Author Cam Hui

Posted: 13 Apr 2012

Sometimes you have to go beyond the headlines to get the real story. Here’s an example.

The Washington Post published an article indicating that slowing growth in the American labor force is foretelling trouble for the economy [emphasis added]:

If demography is destiny, the U.S. economy may be in the midst of a decades-long slowdown.

The U.S. labor force is growing at about half the rate it was 20 years ago; according to recent projections by the Bureau of Labor Statistics, it will continue to expand at a slightly lower pace through 2020.

Slower growth in the number of workers tends to hold back gross domestic product and employment, economists say. And that makes it less likely that the economy will pick up steam at the rate it did in previous recessions.

These changes in the labor force “imply that future recessions will be deeper, and will have slower recoveries, than historically has been the case,” according to a paper issued last month by James H. Stock of Harvard University and Mark W. Watson of Princeton University.

Their research shows that as much as half of the relative slowness of the recent recovery may be attributable to the fact that the growth of the U.S. labor force has declined.

I beg to differ. While the rate of growth may be slowing, labor force growth remains positive, as I show in my annotation (in dark red) of their chart below:

Contrast this pattern with the forecasted working age population growth in other economies in the decades to come:

In fact, this analysis suggests that America may see a demographic dividend in coming decades:

Among the world’s major advanced countries, the United States remains a demographic outlier, with a comparatively youthful and growing population. This provides an unusual opportunity for America’s resurgence over the next several decades, as population growth elsewhere slows dramatically, and even declines dramatically, in a host of important countries.

The author, Joel Kotkin, does qualify his comments [emphasis added]:

This demographic vitality, however, can only work if there is substantive increase in the economic growth rate and particularly in employment. A growing population brings new entrants into the labor force at a rapid rate. Historically, a relatively positive relationship between workforce entrants and dependents, both old and young, has generated waves of growth across the past several decades. This is widely known as “the demographic dividend.”

The demographic problem the US faces is the ratio of old to young, i.e. there aren’t enough young workers to support retirees (Baby Boomers) as they age. However, this chart from Rob Gundlach shows that the US is in better shape than many other industrialized countries.

Sometimes you have to look beyond the headlines to get the real story.

Cam Hui is a portfolio manager at Qwest Investment Fund Management Ltd. (“Qwest”). This article is prepared by Mr. Hui as an outside business activity. As such, Qwest does not review or approve materials presented herein. The opinions and any recommendations expressed in this blog are those of the author and do not reflect the opinions or recommendations of Qwest.

None of the information or opinions expressed in this blog constitutes a solicitation for the purchase or sale of any security or other instrument. Nothing in this article constitutes investment advice and any recommendations that may be contained herein have not been based upon a consideration of the investment objectives, financial situation or particular needs of any specific recipient. Any purchase or sale activity in any securities or other instrument should be based upon your own analysis and conclusions. Past performance is not indicative of future results. Either Qwest or Mr. Hui may hold or control long or short positions in the securities or instruments mentioned.


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