By John Richardson
FINALLY – for the first time – one of the major Western central banks is in agreement with what Paul Hodges and I have been arguing since we released our book in 2011 – Boom. Gloom & The New Normal: The retirement of the babyboomers is a critical issue.
John Fernald of the San Francisco Federal Reserve Bank, wrote in a new paper this week:
“Estimates suggest the new normal for U.S. GDP growth has dropped to between 1½ and 1¾%, noticeably slower than the typical post war pace [see the above graph from this study]. The slowdown stems mainly from demographics and educational attainment. As baby boomers retire, employment growth shrinks. And educational attainment of the workforce has plateaued, reducing its contribution to productivity growth through labor quality. The GDP growth forecast assumes that, apart from these effects, the modest productivity growth is relatively “normal”—in line with its pace for most of the period since 1973.”
The paper mainly focuses on the labour-market implications of the retirement of the Babyboomers:
“In the 1950s and 1960s, population (yellow line) grew more rapidly than the working-age population ages 15 to 64 (blue line) or the labor force (red line). In contrast, in the 1970s and 1980s, the labor force grew much more rapidly than the population as the baby boom generation reached working age and as female labor force participation rose. Those drivers of labor force growth largely subsided by the early 1990s. Since then, the labor force, working-age population, and overall population have all seen slower growth rates.”
What the paper doesn’t fully explore is that the nature and quantity of demand is being radically reshaped by the retirement of the Babyboomers and the decline in Western birth rates below the population replacement rate of 2.1 babies per mother since the 1970s. As we wrote in our study, Demand: The New Direction for Profit:
The 1970s saw the Boomers, the largest and wealthiest generation in history, starting to join the Wealth Creator 25-54 age group. This is the period of life that corresponds to the period of peak demand:
- The under-25s are a low-income and spending group, mostly dependent on their parents for income. Even those who leave school and immediately enter the labour force usually earn relatively low wages.
- The Wealth Creators, however, usually see their incomes rise steadily as they move forward in their careers. Both manual and white-collar workers progress up the pay-scales as their skills develop and they learn from experience. Their spending capability thus increases exponentially, especially as they settle down and have families.
- The 55+ generation, however, sees people’s incomes start to decline as they move into retirement. Average pensions are well below average earnings, even when one adjusts for lower tax rates, and only a relative few have pensions linked to a high percentage of earnings. At the same time, of course, their spending reduces as they already own most of what they need and their children become independent.
Seventy percent of the US economy is driven by consumer spending – and so understanding the impact on demand of the retirement of the Babyboomers is absolutely essential. The next step is to then come up with economic policies that compensate for this huge, multi-generational shift in demographics.
Instead, though, Western central bankers have wasted vast quantities of stimulus money in trying to get people to buy things they don’t need and anyway cannot afford. The end-result has been asset bubbles and global debt levels that are a major threat to global economic, social and political stability.
Meanwhile, public resentment at shrinking real income levels has grown with populists filling the policy vacuum created by mainstream politicians. So we have ended up with Brexit and quite possibly a global trade war in 2017.
Chemicals companies need to plan for events beyond their control. At the same time, they have a huge opportunity to grow revenues and profits through managing their own demand.