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Demographics benefit the economy long before a slowing birth rate will work against it

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December 30, 2008 – Comments (17)

Dwot, whose blog I love BTW, posted a thought-provoking message about how population dynamics will impact the economy in the future.  Definitely check it out if you haven't already: Population Dynamics in Investing.

Her theory that the current economic problems will cause a slowing in the number of children born makes a lot of sense, but according to what I have read the demographics of the United States will actually help to prop up the economy before any possible slowing would harm it.  I wrote a post on this subject in early December: Demographics got us into this mess & will get us out of it...eventually.  Here's the text from it:

"I came across a fascinating blog this afternoon by a gentleman named Kenneth W. Gronbach who is a self-described "nationally recognized expert in the field of Demography and Generational Marketing." 

I find a post that he made back in October titled "The Worldwide Financial Crisis, Demography and The End of the World" particularly interesting (link).  In this post, Gronbach contends that The United States' demographics are as much to blame for the current housing meltdown as anything:

"Roughly eighty million Baby Boomers were born in the United States between 1945 and 1964. The peak of the Boomers was born between 1957 and 1961 and are at the peak of their earnings and consumption right now according to the Bureau of Labor Statistics. They bought and built big houses that were typical of their earlier stage in life. The Silent Generation, born 1925 to 1944, that preceded the Boomers was a small generation of about fifty million owing to reduced fertility during the Great Depression and WWII and virtually zero immigration during that time period. The Boomers bought the Silents’ homes as the Silents retired but the demand outstripped the supply so Boomers built new homes with a vengeance. Now the Boomers are reaching retirement age at the rate of one every eight seconds and it is time for them to sell their big homes and move on. The problem is the younger generation right behind them, Generation X born 1965 to 1984, has critical mass of about seventy million owing to reduced fertility during this time period attributed in large part to Row Vs Wade. In very simple terms this means that for every eight Boomer houses for sale there are only seven Generation X buyers.  With the help of relaxed federal lending/mortgage standards the market found marginally qualified buyers to make up the difference in the generations using subprime loans..."

In short, droves of Baby Boomers are retiring and selling their homes and there aren't enough younger buyers who are financially ready to buy homes to absorb the new supply that's hitting the market.  This is an interesting and very plausible theory.

The good news is that the demographics of the U.S. will shift again and help to soak up the excess supply...eventually.  Generation Y now has 90 million members, all of whom are 23 years-old and younger.  They will enter the housing market over the next several years.  Plus the Baby Boomer generation is at the very peak of its tax paying ability, meaning that the U.S. should have enough money...or at least be able to print enough...to get us out of this mess.

Interesting stuff."

Of note, 2007 set a record for the highest number of births ever recorded in the U.S.  The USA Today published an article on this subject back in July: Is this the next baby boom?  Clearly the demographic trends will work for the economy long before they work against it.  Any headwind from lower birth rates that might occur will be at least twenty to twenty-five years down the road. 

I have already contributed two children to the cause, but I don't plan on having any more.  My wife has a friend who was on the fence about whether to have a third child who eventually decided to go for it...only to have natural triplets.  Yikes.  I'm not taking any chances.  I love my two sons very much but I'm not interested in having any more.

Deej

17 Comments – Post Your Own

#1) On December 30, 2008 at 11:20 AM, eldemonio (98.04) wrote:

Deej,

Thanks for the story - I now have some ammunition for my wife.  Natural triplets = Surprise - you're screwed!

I also have two kids, a boy and a girl.  I've tried the "don't be a kid hoarder" argument to no avail.  I think your natural triplet story just might work. 

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#2) On December 30, 2008 at 11:42 AM, carcassgrinder (45.40) wrote:

Deej,

        It seems, also, that the prices Gen. X'ers are expected to pay for the homes being sold by the Boomer generation is disproportionate to their earnings when compared to the prices the Boomers paid for the Silent homes. 

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#3) On December 30, 2008 at 11:48 AM, DemonDoug (32.19) wrote:

I am absolutely incensed that he equates lower birth rates with Roe v. Wade.  Anyone who makes that type if idiotic remark deserves never to be listened to.

If anything lowered the birth rate, it was birth control, but you could also factor in the fact that there weren't as many people born in the late 1930s and early 1940s with the depression and the war, these are the people that would have been having and raising kids from 1965-1984.

Right-winged politico-religious statements have no place in discussions such as these, and anyone who makes them is pointless to listen to.

As far as children being born, the question I have is, who is being born?  And they will be buying homes in, what, 20-30 years?

Deej, I respect your opinions a lot, but you are using a lot of faulty logic and data here.  Also, look at your chart - birth rate went down significantly during the Great Depression, and if we have a repeat of that, I would expect birth rates to again go down.  However, the point is that we won't be having exponential population growth anymore, one way or another that has to stop, and homes are still way too expensive.

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#4) On December 30, 2008 at 11:57 AM, briyan (31.76) wrote:

I think the birthrate will continue to go up as our society inevitably declines.  At least here in the United States, it's simple mathematics.  The irresponsible, poor, and unproductive members of society reproduce at a much faster rate than the positive contributors.  We're fighting a losing battle.

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#5) On December 30, 2008 at 11:59 AM, megank12 (< 20) wrote:

Thanks for reading everyone. 

You're right, eldemonio, that is one scary story.  I'm glad if it helps you out ;).

Doug, I'm sorry and surprised that you were so offended by this post.  The purpose of it certainly was not to make a political statement.  I actually am pro-choice.  I completely agree that sort of emotional debate really has no place in a site about investing. 

The poster of the linked article is hardly "Right-winged politico-religious."  If you read any of the interesting stuff that he writes you would see that he actually speaks very favorably about Obama.

My point was that the economy will benefit from a very high birth rate that we have experienced lately for at least twenty years before any possible pain would be felt from a slower birth rate caused by the country's current economic problems.  I invest for the long-term...but the companies that I buy today I certainly do not anticipate owning a quarter of a century from now.  A lot can happen between not and the time that a headwind from a low birth rate today (and there's no guarantee that it will even happen) is even felt.

Deej

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#6) On December 30, 2008 at 12:05 PM, TMFDeej (99.25) wrote:

Thanks for reading everyone. 

You're right, eldemonio, that is one scary story.  I'm glad if it helps you out ;).

Doug, I'm sorry and surprised that you were so offended by this post.  The purpose of it certainly was not to make a political statement.  I actually am pro-choice.  I completely agree that sort of emotional debate really has no place in a site about investing. 

The poster of the linked article is hardly "Right-winged politico-religious."  If you read any of the interesting stuff that he writes you would see that he actually speaks very favorably about Obama.

My point was that the economy will benefit from a very high birth rate that we have experienced lately for at least twenty years before any possible pain would be felt from a slower birth rate caused by the country's current economic problems.  I invest for the long-term...but the companies that I buy today I certainly do not anticipate owning a quarter of a century from now.  A lot can happen between not and the time that a headwind from a low birth rate today (and there's no guarantee that it will even happen) is even felt.

Deej

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#7) On December 30, 2008 at 12:09 PM, TMFDeej (99.25) wrote:

Sorry for the double post.  I'm on my laptop and apparently my wife checked out my blog and never logged out.  I don't know how she tore herself away from Facebook long enough to read it.  It's a good thing that I said only nice things about my family :).

I have to admit that while I resisted signing up for a Facebook account for a million years...I finally caved in and became strangely addicted to it myself for a week or so before the neovelty wore off.

Deej

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#8) On December 30, 2008 at 12:19 PM, DemonDoug (32.19) wrote:

Hmm well I guess we know who your wife is now Deej lolz.

The point is he makes a completely erroneous and false statement, and any statement that is that incorrect automatically means that anything he says is invalid in my book.  Another factor for low birth rates btw was economic downturn which was severe in the 1970s.  I guess the guy thinks there were no abortions before 1973 or something, and then all the sudden all these women just started having abortions left or right.

I am not making you out to be anything deej, I just think you used a very bad article to argue against your point.

Respectfully, I think you are wrong about soaking up inventory.  Older people will move to smaller homes, people having kids are poorer and will be less educated, there is no pent-up demand for million dollar condos in miami, also many of us like myself who rent have made out like gangbusters in this housing bust while everyone is losing their shirt, I am no poorer today than I was 2 years ago, and in fact am more wealthy due to wise investing decisions (mainly pulling 65% of my entire stock portfolio into cash in 2007).

In 20 years all the current inventory might be soaked up, but there are close to 20 million vacant homes in this country.  That's a looooooooot of roofs to put people under.  (as opposed to people to put roofs over.)

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#9) On December 30, 2008 at 12:28 PM, floridabuilder2 (99.31) wrote:

TMFDeej....

Obviously being in homebuilding I spend a lot of time looking at population trends... because unlike other industries, homebuilding mainly benefits from increase in population growth because homes as an asset class or consumption class last much longer than things such as food, toys, cars, etc....

national homebuilders have the ability to close shops in some cities and open shops in others... there has been a significant increase in population growth in the smile states driven primarily by hispanic immigration... most of these hispanics are / were younger families and their children will and are entering the workforce......

additionally, the baby boomers will and are continuing to migrate to the smile states..... and they live a lot longer

demographics will come into play sooner than people think... land prices will drift to pre-bubble prices, thus allowing home prices to fall significantly while the builder still makes a profit

this is why i am floridabuilder and not rhode island builder

the doom and gloom bears will be shocked to see how well the surviving builder stocks perform over the course of 5-7 years

many people on this site want to debate the next 50 years, peak oil, etc...  If the planet kills itself I will be dead by then..

in the meantime, this downturn is providing an opportunity for those who can see clearly to invest in things that will rebound with a vengence...  population growth and developing countries becoming more power means demand outstrips supply and one of the reasons I like hard assets as a side investment as homebuilding will be my primary income

I only need a 7 year run to get really rich... the world has been around for longer than 7 years, my window is short... anything beyond 7 years I could care less about

fool on and happy new year

great post

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#10) On December 30, 2008 at 12:29 PM, Slipswitch (< 20) wrote:

Population in the US continues to grow but will probably slow.  There is a major difference between the US and the rest of the developed world, which is the large US immigration.  The US economy is unlikely to shrink due to demographics for a long time.  Comparisons to Japan are not valid for this and other reasons. 

Comparisons to the Great Depression are probably not valid because today's world moves a lot faster. We don't have a Hoover and a Treasury secretary who thinks in terms of pure capitalism.

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#11) On December 30, 2008 at 1:05 PM, johnw106 (63.22) wrote:

Roe vs Wade has very much to do with it. It was not just abortions. It was a pardigm shift in thinking as related to a females role in society.
Up until the late 1960's early 1970's women were strongly discouarged from using birth control of any form, let alone abortion. Dress codes were stricter at public schools. Teen age girls who got pregnant were considered social outcast's and shunned.
Foul language being used on public television consisted of "darn" and "crap".
Roe vs Wade was a significant part of the entire "me" movement and a main contributor to the decline in morals and ethics of the last 25 years. The "right" to kill a baby because its inconvienent tied right in with the free love movement (read lapse of morals concerning sexual behavour) and the start of a major decline in marriage.
Why get married and start a family when you can sleep with multiple partners and if you happen to get knocked up, a quick trip to a abortion clinic and a murder later, you are free from any resonsibilty. Add this to the anti-anything established order attitude and "the G-d is dead" movement and you get a generation that doesnt raise familys,instead the poor classes of society wind up with single welfare moms and deadbeat dads dodging child support, and the upper classes simply kill the child. And greed, along with an aversion to commitment is the main motivation in almost all the cases.
You can not seperate socio-political events and paradigm shifts in moral/ethical behavour from economics. Going from a black and white veiw of morals and ethics to a grey "if you dont get caught its not a crime" world veiw has led us into the mess we are in.

Thankfuly the generation now in their twenties seems to be shifting back to family oriented values and a greater sense of their role in the world. A shift from the "me" attitude towards a "its us together" attitude is akin to a fesh breeze blowing away some of the stench left by the boomers.
Let us hope the trend continues and the next few years bring some financial sense back into the main stream along with a renewed commitment to family values.

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#12) On December 30, 2008 at 1:47 PM, eldemonio (98.04) wrote:

john - 

You might want to check out http://www.mitpressjournals.org/doi/abs/10.1162/00335530151144050  and order a copy of a paper titled The Impact of Legalized Abortion on Crime.  The abstract will probably get you angry.

We offer evidence that legalized abortion has contributed significantly to recent crime reductions. Crime began to fall roughly eighteen years after abortion legalization. The five states that allowed abortion in 1970 experienced declines earlier than the rest of the nation, which legalized in 1973 with Roe v. Wade. States with high abortion rates in the 1970s and 1980s experienced greater crime reductions in the 1990s. In high abortion states, only arrests of those born after abortion legalization fall relative to low abortion states. Legalized abortion appears to account for as much as 50 percent of the recent drop in crime.

Who knew that killing babies had an upside? Could immoral baby killing actually lead to a more moral society?

Why get married and start a family when you can sleep with multiple partners and if you happen to get knocked up, a quick trip to a abortion clinic and a murder later, you are free from any resonsibilty.

Amen brother.  I love to sleep with multiple partners and then murder babies, you might call it a hobby of mine.  Seriously - DemonDoug is going to rip yo ass for this right-winged politico-religious statement. 

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#13) On December 30, 2008 at 3:26 PM, DemonDoug (32.19) wrote:

Whether you think abortion is murder or not is immaterial.  Women have been having abortions since the beginning of civilized society.  Right-wingers have absolutely no concept of this history, nor morality when it comes to the safety of women who seek abortions.  For many years, the country with the most abortions in the world was Brazil, where it is illegal.

Annually more than 200,000 women are hospitalized because of botched abortions, government statistics show. Based on those figures some experts estimate the number of abortions could be as high as around 1 million per year.

http://www.alertnet.org/thenews/newsdesk/N09379932.htm

Also:

Where abortions occur:
83% of all abortions are obtained in developing countries and 17% occur in developed countries.

http://www.abortionno.org/Resources/fastfacts.html

Think women in developing countries are going to sterile clinics and having abortions under the care of licensed physicians?

Whatever your personal belief is, illegalizing abortion does nothing to stop abortion, it simply causes injury and death to those who do abort.  And if you make abortion illegal, then what?  Throw the woman in jail?  Will that stop anything?

It won't.  So yes, while I can respect someone's opinion on life at conception, the bottom line is that all illegalizing abortion would do would be to stress our health care and penal systems much further than they already are; as eldemonio pointed out, abortion does lead to a more moral society with decreased crime.

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#14) On December 30, 2008 at 5:33 PM, degaston (99.57) wrote:

Come on DemonDoug .... the focus of Deej's posting and this thread is not on Roe-v-Wade and its effect on Gen-X having 70 million Americans -vs- 80 million Baby Boomers. Perhaps Roe-v-Wade was a major factor or it wasn't. But is certainly NOT the central theme of Deej's thread. What is the central theme is demographics and how the numbers of Baby Boomers, Gen X, Gen Y, etc. are going to impact the market's future. Now what the article doesn't mention or talk about is how many were in the "Silent Generation" -vs- the Baby Boomers and how this could correlate to future market returns as the Gen-Y of 100 millon fills the shoes of Gen-X with 70 million. I'm very interested to study/research what's been the driving factors behind the generational secular bull market runs that started in 1896, 1949 and 1982 -vs- the secular bear market runs that started in 1929, 1967 and 2000. What part did demographics play? 

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#15) On December 31, 2008 at 4:35 AM, dwot (43.80) wrote:

Hmm, quite the abortion debate here.... no comment.

I think with poor job prospects young people will not be as big stimulation to the economy as the baby boom population before them.

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#16) On December 31, 2008 at 6:07 AM, AnomaLee (28.72) wrote:

No one is arguing that the population itself is going to decline soon(absent something extraordinary). But, your article is misleading because it says nothing about the rate of birth (birth per woman, capita, etc.) which has been in a long-term decline.

The record set in 2007 is less than 1% higher than the previous record number of births set in 1957. That was 40 years ago so keep that in perspective regards to the birth rate.

To: Anyone reading

You can put your head in the sand, but the rate of births(and hence rate the population will grow) is declining no matter how you measure it. 

Also, the average life expectancy was 63 during the start of the Baby Boom. Today, the average life expectancy in the US is somewhere close to 78 years(natural) - an increase of nearly 24% in the amount of time the average person had to live.

All of these Baby Boomers, the largest segment of the population, are nearing the age of 63.  Remember, in 1943 at this age people were more worried about signing wills than mortgages so this uptrend was a great benefit to economic growth.

Now, If we were to repeat this the average life expectancy in the U.S. would have to exceed 97 years by 2030 and that seems both unlikely and frightening if it does happen...

However, trends never continue unabated...

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#17) On January 01, 2009 at 2:07 PM, arendth (< 20) wrote:

Your figures are incorrect.  As is typical you only looked at birth rates in your calculations.  Your forgot to add in immigrants.  In 1965 the USA changed the immigration law to allow in up to 1 million per year.  Since the average age of an immigrant is 29.  When the leading edge of the boom reached 29 we can start adding 1 million per year for about 20 years assuming the boom is really 1945-1965.  Which would mean that the boom generation is not 78 million but is 98 million.  This means that close to 5 million per year will reach 65 years old starting in 2010.  A much higher figure than is typically cited.

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