We Have A Population Problem
In our blog of 9 Oct 2020, (Productivity: The Key to Economic Growth), we commented on the importance of productivity, defined as economic benefit per worker. Historically, the U.S. has done a relatively good job regarding productivity. Moreover the increasing adoption of direct human/robotic interaction, as discussed in our blog of 15 Oct 2020, (Cobots), augers well for future productivity gains.
Our problem is demographics. According to the latest long-term budget outlook released by the Congressional Budget Office (CBO), the agency expects annual economic growth to average just 1.6% over the next thirty years. The key underlying factor in this projection is the expectation that the number of babies that a woman is expected to have during her lifetime will drop to 1.6 next year, the lowest in more than a century and far below the 2.1 rate at which each generation exactly replaces itself.
The obvious solution to improving economic growth, given a falling fertility rate, is increased immigration. That gives rise to significant political issues, making forecasting difficult. Financial modeling, as discussed in our blog of 16 Oct 2020, (Understanding Financial Modeling), suggests that different modelers can look at the same data and come to different conclusions and expectations.
Investors should recognize that, while long term growth estimates are subject to considerable uncertainty, the likeliest conclusion is, absent a significant increase in the number of workers, growth rates are probably going to be under pressure.
All comments and suggestions are welcome.
Walter J. Kirchberger, CFA