Demographics matter
This week, we have focussed on jobs data and the anticipation of Powell's speech at Jackson Hole. Today we are turning our attention to a factor often overlooked but crucial for job creation: the growth of the working-age population.
Back in December 2000, the US working-age population was flourishing at a robust pace of 3.9 million annually. Fast forward to today, and the latest figures paint a starkly different picture, with growth estimates hovering at around 1.7m per year, compared to an overall population of 342 million. This slowdown matters because GDP growth relies heavily on the number of people employed and their incomes.
The US Congressional Budget Office (CBO) projections on US population growth are worth considering. While the population is set to reach 383 million by 2054, this growth is decelerating. More importantly, the civilian non-institutionalized population aged 25 to 54 - prime working years - is projected to increase at a mere 0.3% annually, a sharp contrast to recent decades.
The implications are clear: a slower-growing workforce means fewer people contributing to the economy, which can dampen GDP growth and put downward pressure on wages. While not necessarily negative, as real wages are what truly matter, this highlights that underlying demographics do not support sustained high inflation. Even achieving 2% inflation may be challenging given the ageing population and slower growth in demand from the working-age population.
While the US enjoys a more favourable position compared to countries like China, Japan, and Germany, where the working-age population is shrinking, the global trend of slowing working-age population growth cannot be ignored. This will put downward pressure on economic growth rates worldwide in the coming years.
So, while Powell's speech and jobs data grab headlines, let us not forget the silent force shaping our economic future: demographics. Prior to the pandemic, bond yields had been falling for decades, in part due to the slowdown in the rate of population growth. So, it is conceivable that bond yields could return to those lower levels in the years to come once the current excessive budget spending in the US slows to more normal levels.
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