If Donald Trump wants to live up to his election campaign slogan to “make America great again”, he has a problem on his hands, says Moody’s Capital Markets.
Probably an appropriate problem to have for the oldest president-elect in the history of the United States.
As the population ages it’s helping to drive “secular stagnation”, a term used to describe a prolonged period of anemic economic growth.
John Lonski, chief economist at Moody’s Capital Markets, explains:
When the US economy grew by 3.3% annually during the 10-years-ended 2006, the number of Americans aged 65 years and older rose by 310,000 annually, on average, while the number aged 16 to 64 years — a proxy for the working-age population — expanded by a much greater 2.36-million annually. By the 10-years-ended 2016, the average annual increase in the number aged at least 65 years soared to 1.28 million as the annual addition to the working-age population sagged to the same 1.28 million.
Notwithstanding the likely implementation of more stimulatory policies, US growth during the next 10- years-ended 2026 will still be constrained by projected average annual increase of only 470,000 for the number of 16- to 64-year old Americans, which is far less than the forecasted average annual addition of 2.05 million to the ranks of those 65-years and older.
Given those unfavourable demographics, Lonski isn’t all that confident that economic growth will pick up all that substantially, even with fiscal stimulus being applied.
“If the US working-age population grows by 0.5% annually during the next 10-years, then a likely range of 1.0% to 1.5% for the average annual rate of labor productivity growth suggests that US real GDP will increase by between 1.5% and 2% annually through 2026, which is much slower than its 3.2% average annualized increase of the 25 years ended 2006,” he says.
This chart from Moody’s shows the relationship between the proportion of American workers aged 55 years and older and US 10-year treasury yields going back to 1985.
While bond buying from central banks has helped to lower yields aggressively in recent years, as a proxy for where growth and inflation is headed, the decline in yields has occurred as the US workforce has aged.
Moody’s says the two have an strong inverse relationship of -0.84. Essentially one almost always does the opposite to the other.
“If employment growth remains skewed toward older workers, part-time workers will probably constitute an above-trend share of employment, while the growth of both personal income and household spending will be slower than otherwise,” says Lonski.
Less hours worked leading to lower income growth, not exactly the mix to boost household spending, the largest component within the US economy.
Given the current trend, Lonski muses that “the impossibility of making America young again renders it all the more difficult to make America great again”.
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