• [WEBCAST] Raoul Pal & Neil Howe: A Sobering U.S. Economic Reality Check

    Prepare your portfolio for “big picture” paradigm shifts with Real Vision co-founder Raoul Pal and Demography analyst Neil Howe. Watch the replay from this webcast.

Takeaway: The anticipated birthrate rebound still hasn’t happened—and generational trends suggest that it likely won’t.

TREND WATCH: What’s Happening? The latest fertility numbers show that the U.S. general fertility rate fell during the first three quarters of 2016—particularly among young women. Despite economic indicators suggesting that the United States should be ready for another baby bump, it looks like Millennials are holding back on parenthood.

Our Take: While some demographers are convinced that birthrates will rebound as Millennials grow older, this appears unlikely. Millennials have brought new habits and attitudes into young adulthood that could permanently dash their lifetime fertility. Lower Hispanic and immigrant birthrates will also serve as a fertility headwind for years to come.

The provisional fertility numbers for Q3 2016 are in—and the news isn’t good. According to the National Vital Statistics System, the general fertility rate (GFR: births per 1,000 women age 15-49) fell from 62.8 in Q3 2015 to 62.2 in Q3 2016. In fact, the YoY GFR has been declining in 5 of the last 6 quarters. All this comes on the heels of a really bad year for births: In 2015, the full-year GFR matched its all-time low of 62.5 (which itself was set two years earlier).

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Our Healthcare Sector's Maternity Tracker, which measures birth number changes in real time, indicates that further declines are likely just ahead. 

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The results aren’t any more reassuring broken down by age. Younger age brackets are showing the steepest fertility decline. Since Q3 2014, birthrates have fallen 16% among 15- to 19-year-olds, 6% among 20- to 24-year-olds, and 3% among 25- to 29-year-olds. The decline in the 25- to 29-year-old birthrate is particularly disappointing, considering that this age bracket historically has posted the highest rate.

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To be sure, birthrates over age 30 have risen somewhat. Since Q3 2014, they’re up 2% among 30- to 34-year-olds, 3% among 35- to 39-year-olds, and 6% among 40- to 44-year-olds. But this rise hasn’t been enough to mitigate declining young adult fertility, since the percentage drop in birthrates under age 30 is larger than the percentage rise in birthrates over age 30.

Keep in mind that under-30 age brackets have always accounted for the most births, though the margin has been shrinking over time: In 1986, women under age 30 accounted for 74% of births. In 2015, they accounted for only 56%.

What makes the new figures even more frustrating is that in 2014 the total fertility rate (TFR) actually ticked up, leading many demographers to breathe a sigh of relief and proclaim that the poor numbers in 2013 were a one-time blip. Well, it now appears that the good news in 2014 was the anomaly.

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Looking over a broader time span, it may be that the "Millennial Plateau" in higher fertility rates—running from the late 1980s to the early 2000s—has come to an end.

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So powerful is this fertility downdraft that it is overwhelming good news in the economy that should, at least temporarily, be pushing births back up.

Real median household income rose by 5.2% in 2015, the biggest rise ever recorded by Census and the first rise since the Great Recession. (See my Zeitgeist on the median income boost.) But it’s been over nine months and the economic boost isn’t showing up in the birthrate. In fact, the steeper birthrate decline in Q3 2016 very well may be a reflection of a worsening economy in late 2015. Any optimism from the full-year median income boost has already been spent. Fertility forecasters, who rely heavily on economic modelling, are once again getting spun around.

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WHY FERTILITY MATTERS

Let’s zoom out a bit. Why should we care about these numbers?

Simple: Fertility has a three-pronged relationship with the economy. First, rising fertility is an indicator of short-term demand growth. A higher birthrate means that consumers are confident enough in the immediate economic future that they’re comfortable starting a family.

Second, rising fertility is a driver of short-term demand growth. No matter why parents have a child, the very fact that they have one spurs necessary purchases even if they have to borrow to do so: cribs, diapers, food, clothes, health care, housing... the list goes on. New babies are thus a driver as well as an indicator of a Keynesian or "macro" demand shock.

Finally (and most importantly), rising fertility is a driver of long-term economic growth. A jump in births will one day translate into a jump in the number of adults—which increases total economic capacity by boosting the number of workers and consumers. When productivity growth slows down, population growth can easily become the most important contributor to real GDP growth from one decade to the next.

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Since the Great Recession, most high-income societies have experienced some fall in their fertility rates. Yet the U.S. fall has been steeper than most. Ten years ago, Americans boasted the highest birthrate of any major developed country. No longer. In 2016, according to estimates by the Population Reference Bureau, New Zealand, Ireland, and France all have higher TFRs than the United States—and four other developed countries are tied with the United States.

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As decades pass, lower fertility translates directly into a slower-growing workforce—which in turn translates into slower-growing GDP and tax revenues and lower real rates of return. This process is already well underway throughout nearly the entire developed and emerging market world. Over the next 30 years, Americans are looking forward to annual growth rates in the working-age population that are low but positive. In other regions where fertility rates have long been significantly below replacement rate—most of Europe and East Asia, for instance—the growth rates will be negative.

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Historically, the excess of births over deaths ("natural increase" in demographese) has generated the vast majority of U.S. population growth since the mid-19th century. Immigration to the U.S., while high by international standards, was a minor contributor. But that is now changing. With the large Boomer generation entering its high mortality years, the margin between births and deaths is now narrowing—the inevitable consequence of below replacement-rate fertility.

Over time, immigration will become responsible for an ever-larger share of total U.S. population growth. In most of Europe, immigration accounts for more than all population growth. Many policy experts suggest boosting immigration as a means of compensating for declining fertility. This suggestion, however, runs against the grain of growing populist movements whose leaders insist that immigration be cut, not boosted.

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so which way from here?

So where do we go from here? Will U.S. fertility rebound—or continue to disappoint? There are two schools of thought.

The optimistic case: Optimists point to what demographers call the “tempo effect.” This is the observed fact that fertility declines are often followed by fertility rebounds, since women who defer having babies for a few years (say, during times of recession or war) often make up for it by having more babies later. They thereby meet their original family-size goal.

Maybe this is what’s happening to Millennials—though in their case the tempo effect refers less to a temporary adverse event than to a generational shift to a later age of birth. Clearly, say the optimists, we have already seen this happen to some extent with Boomers and Gen Xers.

The pessimistic case: But others say that this time is different. Pessimists say that there’s been a gradual decline in family-size expectations, suggesting that Millennials don’t really want to end up with families that are quite as large as before. The data seem to bear this out: A decade ago, a 15- to 44-year-old woman expected to have an average of 2.4 children over her lifetime. By 2015, that figure had dropped to 2.2.

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More importantly, pessimists point out that a generation’s realized lifetime fertility includes millions of parents who undershoot their goal and millions who overshoot.

And Millennials—here’s where their risk aversion is key—have been especially effective at eliminating overshooting, which happens mainly when parents start having babies at an early age. Witness the outsized recent declines in fertility under age 25, as well as the sharp recent declines in unintended pregnancies within those age brackets.

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According to the pessimists, Millennials will widen the gap between lifetime expectations and lifetime results, resulting in a permanently lower fertility rate.

In fact, history cautions us against counting on the tempo effect. Even in the age of egg-freezing, fertility has a shelf life. “Fertility delayed is fertility denied” is a dictum among demographers. Just look at Europe, where demographers have been expecting a fertility rebound for decades. (All they got was a slight bump from the mid-‘90s to the early ‘00s).

OTHER DRIVERS

So what’s to blame beyond Millennial risk-aversion?

Millennial lifestyle: marrying later. Much of the fertility decline is related to the new attitudes that Millennials have brought into young adulthood. For one, they’re not getting married yet. While previous generations saw marriage as a “cornerstone” of adult life, Millennials see it as a “capstone” that they want to achieve eventually. (See my far-ranging interview on the subject in “Millennials: Are We There Yet?”)

While unmarried parenthood is certainly becoming more common, the fact remains that marriage (other things being equal) is correlated with higher fertility. What’s more, marriage rates have declined the most for less-educated, low-income individuals, who historically have had the highest birthrates. Today, among young adults, the likelihood of marriage is actually higher for high-SES individuals, who historically have had the lowest birthrates.

Millennial lifestyle: city living. As a historical rule stretching back millennia, urban living (holding all other variables constant) is associated with lower fertility. And guess what? In recent years, Millennials have flocked to urban areas. In Millennial-heavy cities like San Francisco, children comprise a noticeably shrinking share of the population.

This urban-centric and largely childless lifestyle is reflected in Millennials’ favorite TV shows like How I Met Your Mother, New Girl, and The Big Bang Theory. This trend sets Millennials apart from earlier youth generations, who didn’t relocate into urban areas to the same degree.

Falling minority/immigrant fertility. Millennial lifestyle changes aren’t entirely to blame for lower birthrates, however. New trends in minority and immigrant behavior may also be driving down U.S. fertility.

During the Great Recession, Hispanic immigration and Hispanic fertility in the United States both experienced precipitous drops. The net effect of these two trends—from which there has been little post-recession rebound—has greatly reduced the projected impact of higher Hispanic fertility on total U.S. fertility. In 2007, Hispanic fertility rates were 46% higher than non-Hispanic fertility rates. By 2015, Hispanic fertility rates were only 19% higher.

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Looking more broadly, the Center for Immigration Studies reported in 2015 that the birthrate for women age 15 to 50 declined more than twice as much for all immigrants as for all native-born Americans between 2008 and 2013.

In the years and decades ahead, immigration trends are poised to further drag down birthrates. Why? As I’ve discussed elsewhere (see: “The Changing Politics—and Reality—of U.S. Immigration”), immigration is falling from Latin American countries (where birthrates are higher) and rising from Asian countries (where birthrates are lower).

THE LOOMING PROSPECT OF SUSTAINED LOW FERTILITY

Forecasters were once hopeful that as the economy continued to recover, it would give Americans the confidence to start having kids again. At worst, this camp believed that fertility would eventually rebound once Millennials realized their childbearing years were running out.

Well, the economy has shown strong signs of recovery, and yet fertility continues to drift. As for the tempo argument, only time will tell how big of a role this plays—but I suspect that the far bigger driver of declining fertility is a combination of Millennial lifestyle habits along with diminished Hispanic immigration and fertility.

Demographers who were once hopeful of a post-recession fertility rebound are now beginning to hedge their bets. In 2016, forecasting firm Demographic Intelligence downgraded its earlier forecast and predicted that the U.S. TFR would not go back above 1.9 for the next five years or longer. If this turns out to be true, the baby in the baby carriage will be only a nursery rhyme—not a reality—for a growing share of younger Americans.