In Chapter 16 of my book Predicting the Markets, I observe that fertility rates have dropped below replacement rates around the world as a result of urbanization. Only in India and Africa are couples having enough babies to replace themselves. Humans are on a demographic path of self-extinction.
Leading the way has been Japan. I have often described the country as the world’s largest nursing home. That distinction undoubtedly will soon belong to China. All around the world, nursing homes will be bulging with more occupants, while the maternity wards will have lots of vacant cribs.
The economic consequences of these demographic trends will be slower growth and subdued inflation, if not outright deflation. That means that interest rates most likely will remain historically low for a very long time. That could be positive for the valuation multiples that investors are willing to pay for the stocks of companies that are able to grow their earnings at an above-average rate. It should also be very positive for the stocks of companies that are able to grow their dividends in this demographically challenged environment.
A global shortage of workers should stimulate more labor-saving and labor-replacing technological innovations. The result should be faster productivity growth. That should give a lift to real wages that should offset some of the slowdown in employment growth attributable to labor shortages.
The scenario I just sketched isn’t a forecast. It is a description of exactly what has been happening in Japan. The forecast is that most of the rest of the world will follow suit. Japan is the poster child for the rest of us who aren’t having enough babies to replace ourselves. Consider the following:
(1) Japan. On a 12-month basis, the number of deaths in Japan exceeded the number of live births for the first time during July 2007 (Fig. 1). On this basis, during July of this year, deaths exceeded live births by a record 351,000 (Fig. 2). The situation has been exacerbated by a record low of only 586,700 marriages over the past 12 months through July (Fig. 3).
So Japan’s population has been falling in recent years and rapidly aging. The percentage of the population that is 65 or older has increased from 25.2% at the start of 2014 to 28.2% at the end of last year (Fig. 4). Yet the total labor force has actually been rising gradually over the past few years (Fig. 5). That’s because the labor force participation rate has been moving higher (Fig. 6). The problem is that more Japanese women have been entering the labor force and not getting married, which depresses the number of births. If that continues, the number of births will remain depressed.
These demographic trends go a long way toward explaining why Japan’s inflation rate remains near zero, despite the ultra-easy monetary policies of the Bank of Japan, which has been targeting a 2.0% inflation rate since January 22, 2013 (Fig. 7). Older people and fewer children aren’t conducive to home-building, car-buying, or the consumption of other durable goods.
(2) China. The demographic profile of China isn’t as geriatric as Japan’s, but it is heading in the same direction, accelerated by the government’s one-child policy that was in force from 1979 through 2015 (Fig. 8). For the first time ever, the percentage of seniors in the population, at 6.6%, matched the percentage of children under five years old during 1998 (Fig. 9). By the middle of this century, the former is projected by the UN to rise to 26.3%, while the latter falls to 4.6%.
Young married adults who have no siblings must accept the burden of taking care of four aging parents. Now that the government has declared that couples can have more than one child, many are likely to be overburdened having even one child.
As I’ve noted in recent months, all this is weighing on Chinese real retail sales growth, which has been on a downtrend for the past several years (Fig. 10).
(3) United States. The good news in the US is that the fertility rate is in line with the replacement rate. However, the demographic trends are heading in the wrong direction. Young people are staying single longer. Newly married older couples are likely to have fewer children than younger couples. The cost of college education is also a downer for many couples, forcing them to consider how many children they can afford.
The proof is in the maternity wards. Over the past 12 months through March, live births in the US totaled 3.84 million, the lowest since November 1997 (Fig. 11). Over the same period, the number of deaths totaled a record 2.36 million. So births exceeded deaths by 1.48 million, the lowest reading on record, dating back to December 1972 (Fig. 12).
Meanwhile, as the Baby Boomers age, they are turning into minimalists. They don’t need their big houses anymore. They don’t need minivans to take the kids to soccer practice. The Millennials are natural-born minimalists, for reasons I have reviewed in the past on many occasions.
I don’t view this as necessarily bad news for the US economy. Rather, I see these demographic trends as reducing the likelihood of an economic boom, which reduces the likelihood of a bust. The business-cycle expansion should continue, and inflation should remain subdued.
Leading the way has been Japan. I have often described the country as the world’s largest nursing home. That distinction undoubtedly will soon belong to China. All around the world, nursing homes will be bulging with more occupants, while the maternity wards will have lots of vacant cribs.
The economic consequences of these demographic trends will be slower growth and subdued inflation, if not outright deflation. That means that interest rates most likely will remain historically low for a very long time. That could be positive for the valuation multiples that investors are willing to pay for the stocks of companies that are able to grow their earnings at an above-average rate. It should also be very positive for the stocks of companies that are able to grow their dividends in this demographically challenged environment.
A global shortage of workers should stimulate more labor-saving and labor-replacing technological innovations. The result should be faster productivity growth. That should give a lift to real wages that should offset some of the slowdown in employment growth attributable to labor shortages.
The scenario I just sketched isn’t a forecast. It is a description of exactly what has been happening in Japan. The forecast is that most of the rest of the world will follow suit. Japan is the poster child for the rest of us who aren’t having enough babies to replace ourselves. Consider the following:
(1) Japan. On a 12-month basis, the number of deaths in Japan exceeded the number of live births for the first time during July 2007 (Fig. 1). On this basis, during July of this year, deaths exceeded live births by a record 351,000 (Fig. 2). The situation has been exacerbated by a record low of only 586,700 marriages over the past 12 months through July (Fig. 3).
So Japan’s population has been falling in recent years and rapidly aging. The percentage of the population that is 65 or older has increased from 25.2% at the start of 2014 to 28.2% at the end of last year (Fig. 4). Yet the total labor force has actually been rising gradually over the past few years (Fig. 5). That’s because the labor force participation rate has been moving higher (Fig. 6). The problem is that more Japanese women have been entering the labor force and not getting married, which depresses the number of births. If that continues, the number of births will remain depressed.
These demographic trends go a long way toward explaining why Japan’s inflation rate remains near zero, despite the ultra-easy monetary policies of the Bank of Japan, which has been targeting a 2.0% inflation rate since January 22, 2013 (Fig. 7). Older people and fewer children aren’t conducive to home-building, car-buying, or the consumption of other durable goods.
(2) China. The demographic profile of China isn’t as geriatric as Japan’s, but it is heading in the same direction, accelerated by the government’s one-child policy that was in force from 1979 through 2015 (Fig. 8). For the first time ever, the percentage of seniors in the population, at 6.6%, matched the percentage of children under five years old during 1998 (Fig. 9). By the middle of this century, the former is projected by the UN to rise to 26.3%, while the latter falls to 4.6%.
Young married adults who have no siblings must accept the burden of taking care of four aging parents. Now that the government has declared that couples can have more than one child, many are likely to be overburdened having even one child.
As I’ve noted in recent months, all this is weighing on Chinese real retail sales growth, which has been on a downtrend for the past several years (Fig. 10).
(3) United States. The good news in the US is that the fertility rate is in line with the replacement rate. However, the demographic trends are heading in the wrong direction. Young people are staying single longer. Newly married older couples are likely to have fewer children than younger couples. The cost of college education is also a downer for many couples, forcing them to consider how many children they can afford.
The proof is in the maternity wards. Over the past 12 months through March, live births in the US totaled 3.84 million, the lowest since November 1997 (Fig. 11). Over the same period, the number of deaths totaled a record 2.36 million. So births exceeded deaths by 1.48 million, the lowest reading on record, dating back to December 1972 (Fig. 12).
Meanwhile, as the Baby Boomers age, they are turning into minimalists. They don’t need their big houses anymore. They don’t need minivans to take the kids to soccer practice. The Millennials are natural-born minimalists, for reasons I have reviewed in the past on many occasions.
I don’t view this as necessarily bad news for the US economy. Rather, I see these demographic trends as reducing the likelihood of an economic boom, which reduces the likelihood of a bust. The business-cycle expansion should continue, and inflation should remain subdued.
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