US economy’s demographic dividend is fast turning into a deficit

Demographic change is creating major headwinds for the US economy, as confirmed by its disappointing first quarter GDP growth of 0.2 per cent.  Consumption accounts for around 70 per cent of US GDP, and new data on household spending from the US Bureau of Labor Statistics (BLS) demonstrate how the ageing of the US population is creating major structural change in the economy.  One key factor is that there are more older people than ever before, due to a combination of the ageing of the US baby boomer generation (those born between 1946 and 1964) and increasing life expectancy.

Older people tend to spend less, as they already own most of what they need and their incomes decline as they enter retirement.  Equally important is the collapse that has occurred in US fertility rates since the peak of the baby boom.  These have nearly halved from the 3.33 babies/woman level of the mid-1950s to just 1.97 babies/woman today, below the level required to replace the population.  As a result, the size of the 25-54 age group, historically the main wealth creators, has plateaued in the US.

The above chart highlights how these two developments have impacted spending patterns between 2000 and 2014:

• In 2000, there were 65m households headed by someone in the wealth creator (25-54) cohort, almost double the 36m in the 55+ cohort
• But from 2001, the boomers began to move into the 55+ cohort, causing its numbers to rise by more than a third, to 52m by 2014. Meanwhile, the wealth creator cohort plateaued at 66m.
• These trends are likely to continue. There are few signs of any increase in fertility rates, while the average 65-year old American baby boomer can now expect to live for another 20 years

These trends have clear implications for the US economy, as this chart confirms:

• Consumption peaks in the 45 to 54 age-group, where the average spend was $63k in 2014
• 35 to 44 year-olds were close behind, with annual spending of $60k, while 25 to 34 year-olds spent $48k
• By comparison, 55 to 64 year-olds spent $56k, and those aged over 65 spent just $43k
• The only major area of spending that increases after 55 is healthcare, which rose from $4783 in the 45 – 54 age group to $6001 for the over-65s

One positive factor is that spending by older Americans increased between 2000 and 2014 in real terms (at 2014 prices) from $43k to $48k, as the first chart shows.  But this was still a 15 per cent reduction against the $57k spent by the wealth creators.  On the negative side, spending by the wealth creators declined by 5 per cent over the same period from $60k to $57k.

The BLS data highlights how baby boomers’ spending when they were in the wealth creator cohort created a demographic dividend for the US economy. But now, the ageing of the boomers and the collapse of fertility rates is steadily turning that dividend into a demographic deficit.

Of course, this is only bad news from the perspective of economic growth. Most Americans are highly delighted at having gained an extra 10 years of life expectancy since 1950. Their main worry instead, given today’s low interest rates, is how to finance their extended retirement.

Paul Hodges is the co-author of Boom, Gloom and the New Normal: How the Western Baby Boomers are Changing Demand Patterns, Again. www.new-normal.com