Custom Search

Free Copy of “The Inflation Threat”

FREE eBook ($9.79 value):
"The Inflation Threat"

Wealth Creation eBook

Create Wealth

Will America's Phoenix Rise From The Ashes?

Posted by Mark Motive on February 19, 2012 Charts, Economics, Mark's Blog, Markets, Personal Finance, Real Estate, Society Add comments
Feb 192012

Analysts and academics around the world have been predicting the demise of the American Empire for several years. While not all forecasts are as dramatic, ask the average person in the street where they think America is headed. I would bet that few predict a multi-decade boom or secular bull market.

Throw conventional wisdom out the window for a minute.

Is America near the start of a secular economic and stock market boom?

The ‘safe’ case to argue is for prolonged doom and gloom. But when too many people (including myself) accept something as fact, they are often proven wrong. To challenge conventional wisdom and my own assumptions, I will attempt to cover the other side of the debate.

To make my bullish case, I will focus my attention on demographics and housing, and ignore the endless supply of doom-fodder.

Demographics

Despite the conventional wisdom, America doesn’t have nearly the same demographic problems as countries like Japan and Canada. Societies with high retired-to-working age population ratios can experience population shrinkage, deflation and a decline in economic output. Moreover, pressure on the working age proportion of the population can be immense as they pay to support their elders. Some attribute Japan’s two lost decades to Japan’s aging population.

While America’s baby boomers are aging, as they are elsewhere, relatively high birth and immigration rates (compared to other developed world countries) have kept the younger portion of the US population robust. In fact, America’s total population is expected to grow by 20% over the next 20 years.

The next two charts show that the number of Americans aged 16-19 rival that of the late 1970s and that this age group represents a bulge in the American population pyramid.

Why should we care? The last time America saw a bulge in this age group (late 1970s) was near the beginning of a secular bull market. After the bulge passed, the markets began a long-term bull phase:

  • S&P 500 rose from about 110 to 1469 over the next 20 years
  • DJIA rose from about 785 to 10921 over the next 20 years
  • NASDAQ Composite rose from about 131 to 4572 over the next 20 years

Today’s youthful bulge and continued growth in the American population tell me that America could be at the beginning of a secular economic boom. People enter the work force in their early 20s and generally increase productivity and spending throughout their careers, fueling economic growth. As today’s 16-19yr olds live their lives, they will get married, have children, buy minivans and so on, just like their parents before them. Most importantly, despite the nouveau appeal of renting, they too will buy homes - a driving force behind economic growth.

 

Source: US Department of Labor

Note: The pyramid below is dated 2000, but can be used to estimate current population structure by shifting the bars by a decade.

Housing

Understandably, today’s youth hate real estate. While there may be room for prices to fall further, repulsion against housing tells me a bottom may be approaching. As Sir John Templeton once said, “the time of maximum pessimism is the best time to buy…”.

Today, housing – combined with the youthful demographic bulge outlined above – is compellingly bullish for the future of America.

As of February 17, 2012, the 30 year conventional fixed rate mortgage is 3.78%. In July 2006 that rate was 6.78% (Source: Federal Reserve). During the same period, the average house price in America has declined by 1/3 (according to the S&P Case-Shiller 20-City Home Price Index). Consequently, the cost of the fully-leveraged average house purchase amortized over 30 years has fallen from about $2,120/mth to $1,014/mth. Considering the 2010 median household income is $49,445, the annual mortgage payment savings equates to 27% of household income.

The actual numbers will vary depending on personal credit scores, home purchase price and family income, but the implications are universal. The home buyer of today is in much better shape than home buyers of the mid-2000s - and these benefits can last for 30 years.

The Phoenix Rises

Notwithstanding the current economic crisis, America has a youth bulge that is entering the family formation stage, which may precede a sustained rise in economic activity. In addition, this family formation is happening when the cost of shelter - a large component of family spending - is extremely low.

The benefits of deep home-ownership savings will last throughout the peak spending years, freeing up family income for greater spending and savings. If coupled with some sort of technological breakthrough that enhances productivity, it is quite possible that we see another era of wealth creation as America’s phoenix rises from the ashes.

My question is this: when the impact of demographics and massive savings during the family formation stage gain momentum, can it power through the numerous economic barriers facing America today?

 

  • http://www.facebook.com/joe.eifrid Joe Eifrid

    “.. the number of Americans aged 16-19 (I think the author means 15-19 years old. js)rival that of the late 1970s and that this age group represents a bulge in the American population pyramid….

    …Today’s youthful bulge and continued growth in the American population tell me that America could be at the beginning of a secular economic boom. ..”

    Too bad the facts don’t back this up. The author is taking a small surge in births over 5 years and comparing it to a large surge in births for a whole generation (18-20 years) Here is a chart that shows the facts the best as we know for population.
    http://www.census.gov/compendia/statab/2012/tables/12s0007.pdf

    Look at this chart. Notice the 2010 population numbers. Look at the age group the author thinks will lead to what he implies will be a comparable economic boom like we had when the baby boomers reached their most productive and highest spending years. Look at the population number for that group – 22,040,000. Look at the group in before and after…in fact, look at all the grouping from under 5 year olds to 55 – 59 year olds. All are in the 20-22 million range. Population breakdowns historically have taken the look of a pyramid. That was only logical. You and your wife have two kids. Those two kids marry and produce 4 kids. They all marry and have 2 kids each so that is now 8, then 16, and so forth.

    Then came birth control and TV. (TV? That is another theory of mine for another day) Our fertility rate now is closer 2 meaning we are just replacing ourselves, and the population charts now resemble a column shape that only tapers up after 65 when we start start to die.

    That all started with the baby boomers. The boomers were a generation of nearly 80 million. Basically 4 age brackets with 20 million each. That generation followed a generation of about 49 million. If you look at the chart and the 1980 age break down that generation went from ages 35 to 54. The chart shows a total of 48,434,000. The baby boomers represented a giant boom in the population of proportions we will probably never see again.

    Go back to the 1990 chart. The boomers then are 25 to 44 years old. Total population is 80,618,000. Now look at the same age group today or the generation that follows in 2010, or better yet, we will start with the age grouping the author thinks will lead us into the next economic bonanza..those in 2010 aged 15 to 34. That is a total 84,690,000. Keep in mind that the 15 to 19 years olds today are 27 to 31 years away from their historically highest productive and spending years, taking us out to 2037 to 2041.

    So, the boomer’s generation was 66% larger in population than the previous generation. The generation the author is so excited about looking at a full generation that includes the 15 to 19 year old surge is just 5% larger. That is a big, BIG difference. Even that 5% increase is more than offset by the cultural changes the boomers went through with women joining the work force creating a need for bigger houses, convenience food, multiple bathrooms, multiple cars in the drive way, more clothing per person, and so on and so forth. How can any generation duplicate all that and also what we saw in the leveraging of household spending through credit cards.

    Don’t throw conventional WISDOM out the window just yet.

    Joe Eifrid
    JoeStocks.com

  • Anonymous

    Yes, today’s youth bulge is not the same relative size as during the baby boom generation. But there isn’t an inverse pyramid either, like we are starting to see in Japan.

    According to your numbers there is very little variability in numbers from the baby boom cohort down to kids under 5. In fact, 126 million Americans are age 29 or younger. So there is ample youth population to support the American economy. Maybe the upside isn’t the same as during the baby boom generation, but one could argue the youth population is there to provide support.

    True, the impact may not be as great. But that’s exactly why I said “If coupled with some sort of technological breakthrough that enhances productivity…”

    Also, I think the fact that about 42 million young Americans TODAY have the chance to start their families at a time when housing is dirt cheap can provide a tailwind.

    Finally, perhaps my heavy dose of caveats wasn’t clear, but I’m attempting to challenge the assumption that aging baby boomers will take the American economy down with them to the grave and that America is in a structural decline. There are countless barriers preventing today’s youth from having any impact whatsoever (debt/deficits, unemployment, energy costs, offshoring, etc.). The negative argument is easy…that’s why I attempted the positive case.

    BTW – your statement below is totally wrong (I think you know why, because you got it right later in your comment):

    “Population breakdowns historically have taken the look of a pyramid. That was only logical. You and your wife have two kids. Those two kids marry and produce 4 kids. They all marry and have 2 kids each so that is now 8, then 16, and so forth.”

  • http://www.facebook.com/joe.eifrid Joe Eifrid

    Thanks for the reply Mark.

    The title of your essay is; ‘Will America’s Phoenix Rise From The Ashes?’

    Then you basically argue that demographics may give us a glimmer of hope that we will, will rise from the ashes. All I am saying is that US demographics show no such thing and that relative miniscule bulge you point out is meaningless in the next 30+ years and has no possibility in itself to be the “the beginning of a secular economic boom. ..”

    You wrote; “True, the impact may not be as great. But that’s exactly why I said “If coupled with some sort of technological breakthrough that enhances productivity…”

    No “great” about it…and you better hope there is not a technological breakthrough that enhances productivity. That means less jobs in a society that will have a problem creating jobs due to a lack of a vibrant growing population such we have had in the past.

    The doomsayers are right. Buckle up now because it is going to be a wild ride. Yes, we will rise from the ashes but not in my lifetime.

© 2010 Plan B Economics contact: admin{at}planbeconomics{dot com} Suffusion theme by Sayontan Sinha