“It’s a pretty sobering outlook.”
That’s the key investing takeaway from world-renowned Hedgeye Demography analyst Neil Howe on The Macro Show this week. He’s referring to the disconcerting demographic trends churning beneath the surface of the U.S. economy.
We believe Neil’s work in this area is so important, we wanted to highlight for you some additional, salient takeaways from his findings.
Below we’ve included the entire 32-minute video replay and transcribed (and provided) charts from his presentation.
Director of Research Daryl Jones: Neil, we’re very excited to have you on here this morning. I know you have a few pretty interesting slides to walk us through. So let’s jump right into it.
Demography analyst Neil Howe: Yes, thanks. Well, you know I like to talk about where we are in the broad sweep of history.
What I see right now is that the entire global economic recovery cycle is beginning to wind down. And, I'm a firm believer in everything that the Hedgeye Macro team says here on Quad 4 and Quad 3. But it basically means real growth is slowing down.
Why is real growth slowing down?
The fundamental reason is that we've run out of room for more employment. If you look at age and gender categories individually, and then adjust it by age we are above the level of employment to population rate that we were at in 2007.
That’s a secular trend. So I think we're running on fumes there.
Jones: Yeah, I was going to say you can really see the employment trends in this longer-term graph that you put together.
Howe: Well, yeah, take a look at that. By the way, we were just releasing a piece this morning taking on a recent report by Morgan Stanley, talking about the coming “youth boom” in the economy and how the demographic tailwinds are really at our back. We don't see it that way. If you just looked at the Census Bureau projections, those don't look very encouraging.
So take a look at that chart again, because I just want to point out we will have a little rebound. But the 2020’s looks unremittingly bad. The average growth rate of the working age population would be around 0.2%. That's just above zero.
Howe: The next slide is interesting.
What we did is a very simple model of the economy going back, through the postwar era, going back to 1960. We made a very simple model of the economy where we just basically said, ‘what if we modeled that every year the economy was going to grow at the rate of the working age population plus the trailing 10 year trend in productivity growth and the employment population growth.’
This is a really instructive graph.
You can see, first of all, how our 10-year compound annual growth rate for GDP has really gone down, right? We're way down here at this very disappointing level, but you can see what's contributing to it. You can actually see a lot of history in this chart. You can see, for instance, how back in the seventies, all the boomers coming in and all the women coming into the workforce should have hugely expanded GDP. But of course that was contracted by a huge collapse of productivity and so on.
And you can also see that the problem recently over the past 15 years is that we've been suffering on all counts. That is to say, employment population rates have gone down. The demographic growth has slowed way down and our productivity growth has come down.
So that's a disaster.
Howe: Now, one last chart, we just project that into the future. Take a look at this. We assume this is all written in stone. Those light blue lines, that's just the growth rate of the working age population. We assume that there's going to be no net change over time and we just take the trailing 10-year productivity growth rate and we cast it forward.
Now, you might say, ‘Wow, that looks pessimistic.’ And it is, but keep in mind that the IMF right now was already projecting 1.4% growth by the year 2024. The CBO is at 1.8%. The Fed is at 1.8% as well. We get 1.3%.
Meanwhile, if you want to believe the OMB and Mick Mulvaney and go for 3.0%, you'd need a productivity miracle like we've never seen before. I mean not even back in the early sixties or fifties did you see that.
My point about the OMB is simply underscoring that productivity is going to have to expand massively and productivity is the one thing you can't really model. We can predict certain inputs, such as human and physical capital inputs to creating productivity, but most of it is innovation. Most of it is unpredictable.
So if you're realistic, and you look at 10-year trailing averages just like what we did, it’s a pretty sobering outlook.