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By Robert Johnson, CFA and Jeremy Glaser | 04-12-2017 11:00 AM

Can the U.S. Economy Defy Demographic Destiny?

Without dramatic changes to the birth rate or immigration or other policy measures, the U.S. economy looks set to underperform the growth rates of decades past.

Jeremy Glaser: For Morningstar, I'm Jeremy Glaser. We're here today with Bob Johnson, he's our director of economic analysis, to look at how demographics are driving economic growth, and what the outlook for that is. Bob, thanks for joining me.

Bob Johnson: It's great to be here today.

Glaser: A number of times in these videos and your columns, you've pointed out the importance of demographics, why it's leading to relatively slow growth in the United States. So we're going to take some time to really kind of dive into that a little bit deeper than we usually do. Can you just tell us why demographics are so important to GDP, just generally speaking?

Johnson: Yep. Absolutely. If you think about it, there are really two key drivers of economic activity, and one is population growth, and the second is productivity growth. Today we're going to be focusing on the population growth part of that. The reason it's so important is, the population is the raw materials, if you will, the labor force that potentially produces things. Without people to produce things, you certainly have an issue and you don't have as many people to spend on things if you don't have the population growth. It's interesting how the dynamic has turned up over time. 

A lot of people think back to the 3% and 4% real GDP growth we had in the '50s and the '60s, and think, "Wow, that was really a miracle." Well, at that time, the population growth was pretty close to 2%. Now today when we look at the same numbers in the U.S., since the recovery began we've been averaging about 2.1% economic growth, a full percentage point below the long-term average. Well, when you look at it, it's no surprise the population growth that I mentioned was running, say 1.8%, 1.9%, is now running at 0.7%, or more than 1% less than it used to be growing at, explaining a great deal of the slowing in GDP growth. 

Glaser: When we look at that slowdown in population growth, is that being driven by fewer births, is it less immigration? What are the big drivers?

Johnson: Yep. There's a combination of things that are going on, but certainly one of the big issues is that the native-born population is not growing as fast as it used to, and that immigration has actually picked up some of the slack. If you look at the data right now, roughly 1.3 million population additions each year are from native born, that is births less deaths, and about the same number, 1.3 million, is from immigration. So it's a pretty equal split right now, so I mentioned it was a 0.7% population growth, so it's about 0.35% is coming from native, and 0.35% from immigration. So we'd be growing at half of what we were without an immigrant population. 

Glaser: Looking on to the future, I know the Census Bureau does some work on this, what are the expectations for what will happen with population growth, any signs of it picking up soon?

Johnson: No, over the next 50 years they're projecting that the population growth will fall further to something like 0.4%, and even that's very, very dependent on immigration policy and how many immigrants come in to the country. If you look at the data, I'd mentioned we were running about 1.3 [million] in the native-born category right now, and as deaths begin to pick up, as the baby boomers reach that time in their life where that happens, we expect that the births and deaths will move closer together, as does the Census Department, not just us. By 2060, the native-born population will only be growing at about 400,000 per year versus 1.3 million today, so they'll making a much smaller contribution. Really, the population growth will come from the immigrant population, which the Census continues to project will grow at 1 million to 1.3 million three per year, as it has for the last 10 years.

Glaser: There's a lot of talk about immigration reform potentially changing the makeup of immigration, but when you look at it today, who's coming into the country?

Johnson: You know, that is an absolutely fascinating country, and it's changed so much, even in the last five years, that it's almost hard to talk about. But certainly, the workforce that's coming in today is very well educated. The distribution tends to be what we call very bimodal, it's people without a lot of education, but at least as many if not more are very, very highly educated. People that are engineers, Ph.D.s, skilled office workers, those are some of the key dynamics of who's coming in these days. Certainly, the average education of an immigrant today is higher than the median in the U.S. So clearly we're not importing a lot of people that are highly dependent on Social Services, unable to work. Instead, a lot of the growth is coming from very productive, very intelligent folks. 

Glaser: We've been talking about pure numbers of people coming in, but the working age and being in key consumption ages is important, too. What kind of changes have you seen there in terms of the ages of the population?

Johnson: Well, certainly the native-born population has been going up in age as the baby boomers move through the dynamics. Certainly that's been moving the native-born age up, and at the same time, immigrants, for one reason or another, have gotten younger and younger over time. That's really good news, because obviously younger immigrants spend more, and they're more likely to be in the workforce. In fact, the participation rate for an immigrant is far higher than it is for the native-born population. 

Certainly by being more in that 40, 50 age category as they move through that will help offset some of the U.S. native-born population is now on average moving more towards the 60s, where they tend to spend an awful lot less, which is one of the other big dynamics holding the population back. It's just not the growth, it's the fact that people are aging, as people retire, they spend less. By bringing in this fresh blood that's a younger age, it will certainly promote the consumption dynamic.

Glaser: Looking at this all together, though, if there's not going to be big shifts in immigration, there's not going to be big shifts in births, we should be expecting this slow growth to continue for a long time then?

Johnson: Absolutely. Unless something changes to really encourage people to have more families, it's very likely that we'll drift down to this, as a population, drift down to 0.4%, that we're talking a dynamic now of maybe 2% GDP growth. Well, we're going to go another three-tenths lower, which suggests that we're more like 1.5%, maybe 1.7% GDP growth in terms of a long-term outlook. 

Now, all this data is not destiny. I mean, if we find new productivity tools, or the right government policies are implemented, we encourage older workers to stay in the workforce longer, we do some things to encourage consumption, those are all things that can break the dynamic that population seems to suggest. Certainly we've seen Germany do some tax and policy changes over the years that have really helped them avoid some demographic issues. But whether we implement those policies or not remains to be seen.

Glaser: Bob, thanks for your thoughts on demographics today.

Johnson: Thank you.

Glaser: For Morningstar, I'm Jeremy Glaser. Thanks for watching.

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