TREND WATCH
With a turbulent 2018 behind us, forecasters have turned their attention to 2019 and beyond. While most outlets have adopted a bearish-to-cautious view of the future, Morgan Stanley is unflinchingly optimistic. The firm contends that favorable demographic trends, specifically a “youth boom” powered by a rising crop of “Gen Zers,” will push U.S. GDP growth to unforeseen heights by the end of the next decade. We are unpersuaded. Upon closer examination, the full force of the demographic tailwinds referred to in the report won’t hit until the 2030s and 2040s. And even when they do arrive, their impact won’t be as positive as advertised.
Analysts who know the numbers tend to regard the stagnation in workforce growth over the next decade as pretty much written in stone. Morgan Stanley begs to differ. Its new report, The Coming Youth Boom: When Generations Y & Z Combine, contends that “demographic headwinds turn into tailwinds starting in the 2020s, and are long-term bullish for the U.S.” A new “youth boom,” the authors say, will push employment, consumption, and GDP significantly above the levels that official agencies like the Congressional Budget Office are now projecting. Moreover, Morgan Stanley accuses official forecasters of understating the impact that these “tailwinds” will have on U.S. GDP growth. Indeed, so big is this boom that Social Security and Medicare may be in much better shape than anyone realizes; their expected official insolvency dates may be postponed “perhaps by decades.”
This last claim triggered gee-whiz headlines in MarketWatch and Yahoo Finance. It also triggered a withering reply from Chuck Blahous, a seasoned expert on Social Security who has served on its Board of Actuaries. (While the Morgan Stanley study itself has not been officially released to the public, it has been fed to the financial media and widely circulated among clients and friends of MS.)
So we must ask: Is a “youth boom” coming soon? Does Morgan Stanley know something that the rest of us have overlooked? Have all the researchers publishing for years in mainstream institutions—like the U.S. Census Bureau, the U.N. Population Division, and the CBO—really gotten things very wrong?
Let’s start by summing up the gist of the mainstream projections. The 2020s will be a uniquely grim decade if you’re looking for growth in the working-age population. At just +0.2% per year (according to Census), the average growth rate in the 2020s will be barely above zero. This figure is vastly lower than working-age population growth in any earlier decade in U.S. history and is almost certainly lower than any future decade until (possibly) the 2050s. The pessimistic consequences for GDP growth follow suit. Unless you have good reason to expect a dramatic change in labor force participation rates or labor productivity, the slump in the working-age population flows through directly to a slump in expected GDP growth.
Surprisingly, the Morgan Stanley authors don’t offer any fundamental challenge to this view. Rather, throughout most of the study, the authors support their dramatic “boom” thesis in what can only be called creative re-framing. They repeatedly emphasize that the U.S. demographic future looks better than that of many other developed countries. They suggest this gap could be long-term bullish for the USD. Sure, that may make sense. But does this really amount to a “boom” in any ordinary sense of the word? They also point out that “Generation Z” (born from 1997 to 2012) is a “boom” generation compared with the “Millennials” (born from 1981 to 1996) before them even though they are smaller per birth cohort. Why? Because, they say, these Gen Zers weren’t a bust generation like the Xers who followed Boomers.
Another device the authors use a lot is bait-and-switch misdirection. While the headlines point to boom demographics “starting in the 2020s,” none of the actual demographic acceleration they point to occurs until the very end of the 2020s. Nothing significant happens until the next decade. And even what does occur in the 2030s and 2040s is hyperbolized out of all proportion. Even at its early-2040s peak, the growth rate in the working-age population remains far below its average since World War II. Indeed, it doesn’t even rise to the depths of the Gen-X young-adult “bust” of the early-1990s and just barely exceeds the Silent Generation young-adult “bust” of the mid-1950s.
But it’s not all smoke and mirrors. The MS report does make small though significant upward revisions to the CBO baseline GDP projections. These revisions fall into three categories.
- Faster Population Growth. The first problem they point to is population growth. MS argues that the CBO assumes population growth numbers that are slightly below those of Census. This was news to us, since the CBO’s standard practice is to follow the latest Census projections pretty faithfully—and its latest methodological documentation lists no other source for population. We compared the CBO’s 2018 population assumptions with the 2018 Census projection and found a near-perfect match.
- Higher Labor Force Participation. The second and bigger problem they point to is labor force participation (LFP) rates. The MS authors don’t agree with how the CBO projects these rates. Unlike the CBO, which has a highly sophisticated and technical methodology for projecting LFP, MS takes a simple approach. It assumes one unchanged LFP for the entire working-age population (age 20-64) in every future year. And it assumes, for seniors (age 65+), an LFP that linearly increases over time at the same rate that this LFP has increased over the past 20 years.
- Neither of these assumptions make any sense. The rising LFP assumption for seniors is especially perverse. The two main drivers behind the recent rise in senior LFP—the growing economic need for jobs among the elderly, and the shifting age composition of the elderly—will either stop or reverse direction over the next twenty years. In fact, the age-composition effect alone will likely bring the overall LFP of seniors down over the next decade.
- Higher Productivity. The MS authors also suggest repeatedly that productivity growth will likely be higher than mainstream researchers are forecasting. Why? They argue that faster GDP growth generated by their proposed “demographic boom” will itself push up productivity growth. They also argue, based on attitude surveys of “Gen Z,” that the next generation of young people entering the workforce will raise productivity because they will get along so well with “Gen Y” managers. But let’s be cautious. These findings and their effects are entirely speculative. Furthermore, few Millennials will likely hold top managerial positions in large firms until the 2030s.
To recap: The authors argue for a modest upward revision in the CBO baseline labor-force projection for reasons that, in our opinion, have little merit. They further urge that productivity assumptions be boosted on the basis of these modest upward demographic revisions. Bottom line? Take this report with a grain of salt.
TAKEAWAYS
A new Morgan Stanley report predicts that demographic tailwinds will boost U.S. GDP growth far above the levels that the official forecasters are predicting. After careful analysis, we find no reason to believe that the consensus view is wrong.
- The mainstream projections forecast a dramatic slowdown in labor force growth over the 2020s. The growth rate of the U.S. working-age population, which has been slowing dramatically over the last two decades, will reach a historic low during most of the 2020s before rising modestly and temporarily in the 2030s and 2040s. The boomlet of the 2030s and 2040s will happen as the children of the relatively large Millennial Generation reach working age and as a relatively small Generation X starts retiring. Right now, and throughout the next ten years, the opposite is happening: A relatively small late-wave Millennial and Homeland Generation is entering the workplace and a relatively large Boom Generation is retiring.
- Productivity is the wild card. While labor force growth is (relatively) written in stone, productivity growth is more mysterious. Nobody can definitively rule out, for instance, the possibility of a dramatic productivity revival driven by President Trump’s economic policies. To the extent that GDP bulls like the OMB try to justify their buoyant outlook, they typically rely on this argument. This is actually what’s so mysterious about the new Morgan Stanley report. It points to “long-term bullish tailwinds” not by making its primary argument about productivity—what we know least about. Rather, it tries and fails to make its primary argument about demography—what we know most about.
- An honest assessment of the future is sobering. Our best guess of future GDP growth is the product of three growth rates—working-age population growth, prime-age employment-population growth, and productivity growth. We can get a pretty good estimate of GDP growth by multiplying together YoY working-age population growth times the prior trailing 10-year average annual growth rate in the two other variables: prime-age employment-population and labor productivity. What does the future hold? Real GDP growth, on a 10-year rolling average basis, remains under 1.4% throughout the 2020s (compared to 1.6% in 2018). It rises a bit higher in the 2030s and 2040s before falling back down again in the 2050s.
