Labour force and consumer spending edition | FT Alphaville

Labour force and consumer spending edition

A decent review of a theme we’ve been exploring recently, courtesy of Moody’s Analytics:

Several important demographic trends will influence US activity for some time. They include (i) the slower growth of Americans aged 15 to 49 years, which is a population cohort that shows a comparatively strong correlation with the growth of real consumer spending, (ii) the record slow growth of the working age population, (iii) the much faster growth of older workers relative to younger workers, and (iv) the breakneck growth of those 65-and-over vis-à-vis the number aged less-than-65.

On point (iii), take a look at this chart from the San Fran Fed:

Prior to the recession, the participation rate for 25-54-year olds was already in steady decline. This was partly the result of a plateau in the decades-long increase in the female participation rate and partly the result of baby boomers retiring early. At the same time, the participation rate among those 55 and over had been climbing.

And as you can see from the chart above, since the recession started, those same trends have only accelerated, with the youngest showing the biggest declines.

These trends are bad news all around. As we recently wrote, youth joblessness has profound implications for household formation — it slows as households become larger, crammed with young adults moving back in with their parents. Just another reason nobody is buying houses despite rock-bottom mortgage rates.

But MA points out something else that is frequently overlooked in discussions about the aging of both the population and the labour force — point i above: its correlation with consumption growth (emphasis ours)…

Seldom has less-than-favorable demographic change loomed so large in the US long-term economic outlook. In terms of year to year percent changes, real consumer spending shows a significant correlation with the number of Americans aged 15 to 49. A notable deceleration by the year-to-year growth rate of the US population aged 15 to 49 years from its 1.4% average of 1972 to 1996 to the 0.1% of Q2-2011 helps to explain an accompanying slowdown by real consumer spending’s underlying growth rate. After having ebbed from the 3.2% of the 25-years-ended 1996 to a subsequent 2.8%, the relatively slow growth by the number aged 15 to 49 years going forward suggests that real consumer spending’s average annualized growth rate will ultimately reside in a range of 2% to 2.5%. During the near future, annual increases by real consumer spending in excess of 3% will very much be the exception. …

Worse yet, growth by the working age population has been skewed toward aging baby boomers. Holding everything else constant, older workers should have a lower propensity to spend compared to younger workers. As of June 2011, the US population aged 25 to 49 was effectively unchanged from a year earlier, while the segment aged 50 to 64 grew by 2.5%. In sharp contrast, during the nine years ended 1982 — a span that was marred by rapid price inflation and two severe recessions — the number of 25 to 49 year old Americans grew by a much faster 2.4% annually, on average, while the more sedentary 50 to 64 year old group edged higher by 0.6% annualized. Because of the substantially faster growth of younger workers during the 1970s and 1980s, not only could household expenditures recover more fully from a severe recession, but inflation risks were greater owing to the lower productivity and higher spending proclivities of a younger workforce.

Add secular demographic shifts, then, to the list of things affecting US consumption.

Related links:
Consumption conundrums continued – FT Alphaville
Demographics and destiny, US immigration edition
– FT Alphaville
Demographics and destiny, US housing edition – FT Alphaville
SF Fed warns baby boomers may wound the stock market – Real Time Economics