January 18, 2021
There’s one thing the economy and all investors crave, long for, desire, lust after, covet, and dream of… growth.
This craving means that it’s not good enough to produce as many widgets… sell as much software… write as many words… or sell as many toasters… as last year, quarter, or month.
According to Mastercard SpendingPulse, which looks at spending across different payment types, total U.S. retail sales during the holiday period (from October 11 through December 24) rose 3% in 2020 over the previous year.
Breaking down that growth, expenditures on home furniture and furnishings rose the most, increasing by 16.2%. And people bought 6% more electronics and appliances in 2020. Apparel (down 19.1%) and luxury (which fell 21.1%) were the big losers.
So let’s think about that for a moment… For every 100 “Mattress in a Box” sets ($499 from Nectar Sleep) and La-Z-Boy Collins Sofas ($1,099 from you-know-who) and Forsyth Executive Desks ($1,599 at Bassett Furniture) that the hungry piehole of the American consumer bought in 2019… well, they bought as many again – PLUS another 16 of them. (Of course, general retail-spending data don’t necessarily translate directly to specific items on store shelves… but you get the idea.)
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And for every 100 Dell Inspirons (starting at $319.99) and Star Wars R2-D2 Toaster from Williams-Sonoma ($79.95) and Bose Noise Cancelling Wireless Bluetooth Headphones 700 ($379.95) that Americans bought the previous Christmas (or similar items, if these specifically weren’t available)… they bought all of that, plus six more this Christmas. And so on…
That’s what growth means… Everything last time around – and then some. And it’s not just this year… it’s next year. Buy everything that you bought the previous year… plus another x%.
Now, if we only do as well as last time around – that is, zero growth – well, it’s a failure. We’re told that everything must grow… We have to make more, sell more, produce more, get more, than last time around.
And if total buying is less than the previous year – if it actually falls, and people buy in total only (say) 99 headphones or sofas or whatever, compared to 100 the previous year – it’s a disaster.
Economies go into recession… share prices crater… Bloomberg TV goes to a shade of gray… people talk about “the bad economy.” All because there wasn’t that incremental three or four purchases of that fancy mattress or laptop or whatever – it’s that few extra that make all the difference.
Get Used to It… It’s Going to Get Harder
In coming years, the growth obsession of the global economy is going get harder and harder to satisfy. It’s a question of when – not whether – we’re going to be talking mostly about how much economies and earnings and sales are contracting (or, in the euphemism of investors, “experiencing negative growth”)… and “positive growth” will be as outdated as flip phones and shaking hands.
When you sift through the doublespeak of Forbes magazine and talking-head economists, growth boils down to two key factors: Change in the size of the working-age population… and how much those working people are making or creating – that is, their productivity.
That means if more people in a country are doing economically productive things (like building houses, making cars, or selling insurance) – and they do it quicker (get more done in a workday)… the overall economy will grow.
(In economics-speak, this is about “aggregate supply”… while the other main part of economic growth is “aggregate demand” – that is, consumer and government spending, investment, and exports. Though your old economics textbook will make this a lot more complicated, it boils down to this… They need each other. If demand falls, so will supply.)
For decades, the rising number of working-age people (age 15 to 64) in the U.S. was a big driver of the American economy. More people meant more folks creating more value, buying more, and delivering growth.
From 1980 to 2019, the number of working-age people increased by 45% to nearly 206 million people.
But in January 2019, the number of working-age people started to fall. And for the first time over the course of a year, in 2019 the number of Americans of working age declined by 0.11%.
That’s a tiny drop. But it happened every month of the year, and it’s continued since then. The number of working-age Americans has been lower than the same month the previous year.
And more importantly, this isn’t going to reverse. Before it started to fall, growth in the working ages population had been slowing since the start of the century. The available workforce grew by 2.19% in 2000… 1.26% in 2007… and 0.65% in 2015.
So what’s behind that decline? Well, the number of people of working age is determined by the birth rate (with a 16-year lag)… and by immigration.
For centuries, the American brand of “the land of opportunity” has attracted the smartest and most motivated people from the rest of the world.
Since 2016, the number of legal immigrants entering the U.S. has fallen by an average of around 45,000 annually, due in part to tightening immigration restrictions by the U.S. White House.
But the more important reason there will be fewer workers – not today, but soon – is that women in the U.S. are having fewer children.
The fertility rate in the U.S. hit a 35-year high in 2007, at 2.12 births per woman. But even that was only just above the replacement level fertility rate of 2.1.
The replacement level of fertility is what it sounds like – it’s the average number of children born per woman, so that a population replaces itself from one generation to the next.
Since then, the rate has mostly declined, to 1.73 children per woman in 2018, according to the World Bank. That matched the all-time low from 1976. (As recently as 1960, the average American woman gave birth to 3.6 children.)
The only two states today that are birthing above the replacement level are Utah and South Dakota – while the least fertile are Rhode Island and (would-be state) Washington, D.C.
If “demography is destiny” – a quote attributed to 19th-century French sociologist Auguste Comte – then economic growth is headed to the red zone in coming years.
As the number of new additions to the working population falls, unborn children can’t join the workforce 15 years later.
That means one of the long-term structural advantages – and growth drivers – of the American economy is slowly vanishing.
What About Productivity?
Productivity, the other part of the growth equation, also doesn’t hold out a lot of hope.
Growth in productivity – which is output per employed person – has been declining over the past few decades in the U.S. From 1990 to 2000, productivity was rising by an average of 2.3% every year.
But over the past 10 years, it has been increasing at only 1.3% per year. That’s partly because the one-off jump, thanks to the computer boom, has long since worn off. And also, during times following eras of increased productivity, it’s harder to get better from a higher base level.
Efficiency growth is similar to the conundrum of buying more stuff. How much more can people get done – insurance policies sold, dresses made, French fries served, hotel rooms cleaned – than they did last year?
Again, it’s doing all the work they did last year… plus something extra on top of that. If they can only do as much as last year, efficiency hasn’t improved… and there’s no growth. That bitter primal wail in the black night is a thousand CNBC anchors mourning the death of their capitalist dream.
Small Numbers Add Up
But unless productivity growth improves – or there’s a coronavirus-inspired baby boom, or a sudden influx of immigrants – American GDP growth is going to be sailing into some stiff winds in coming years.
The economic growth a developed economy is able to wring out – whether it’s 1% or 3% or even 5% – doesn’t sound like much. The difference between one and five, in the context of 100 (because remember, we’ve already reached 100) is a rounding error… it’s what the cashier gives you back as pennies and you don’t even notice. And how many pennies on the ground have you walked past or stepped on over the past year?
But over time, those seemingly small differences become tremendous. That’s the power of compounding… As Albert Einstein may have said: “Compound interest is the eighth wonder of the world. He who understands it, earns it … he who doesn’t … pays it.”
An economy (or bank account, for that matter) that’s growing by 1% will take nearly 70 years to double… while 2% growth will halve the time needed to double in value to 35 years. And at 3%, it’s 23 years. Small numbers can have a supersized impact over time.
Of course, zero growth doesn’t compound at all. And that’s looking to be more likely in coming years.
It’s Not Just Here
Fortunately (or, not) there’s already a blueprint for what’s going to happen to growth in the United States.
Many countries in Europe, along with China and Japan, have a fertility rate even further below replacement levels than the U.S. (South Korea is the least-procreative country in the world, with an average of just one child per woman.)
Of the 20 most populous countries, just three – the U.S., Canada, and Australia – will see an increase in the number of adults age 20 to 49 (the most economically productive, and highest-consuming, cohort) over the next half-century.
China – home to more people than any other – is going to be particularly hard hit. During that time, the number of Chinese in that critical age group will fall by 36% – or by an incredible 225 million young workers and consumers. (That’s roughly the entire population of the U.S. except for the four most populous states.)
Meanwhile, American productivity growth – for now – is stronger than that of other developed economies. For example, Germany – notwithstanding its historical reputation for efficiency – has become just 1% more productive per year since 1980, compared to 1.7% in the U.S. over that period.
But productivity growth in the U.S. is, like the fertility rate, slowly sliding… from an annual average of 2.3% from 1990-2000, to 2.0% in the next decade, and 1.3% in 2010 to 2019.
This reflects in economic growth figures. The EU – much of which is plagued by negative population growth, and meager improvements in productivity – has had average annual economic growth over the past 20 years of 1.7%, compared to 2.2% for the U.S. Again, that might not sound like a lot… but multiplied over decades, it’s a big difference. And we know which way the U.S. is going.
The U.S. Stock Market Shift
Put into stock terms… The United States is in the process of shifting from a growth stock to a cash-flow/dividend story. And that is a difficult –and, if you’re a shareholder, costly–process.
Growth stocks have high revenue growth, and (usually) high earnings growth… Think of Netflix in its boom days. You buy it because the share price might double or quintuple… or more.
In contrast, dividend stocks have steady cash flow – that is, they earn a solid profit – but don’t grow much… Think of Grandpa’s boring old power utility, or a real estate investment trust (“REIT”) where shareholders collect rent on property that doesn’t change in value much. You might receive a dividend of 3% or 5%, but the share price probably won’t move much.
The problem with growth stocks is that eventually their growth curve flattens. Revenues can double for only so long… Then, they can grow at 20% per year for only so long before new buyers are exploited, upsells are exhausted, buying competitors has run its course, and accounting legerdemain ends. Competitors see the opportunity and cut into the company’s market, and margins decline – and growth falls.
The best companies – and stocks – can deliver growth for decades. Mortals have a much more difficult time. And if you’re the shareholder of a stock that suffers the infamy of slowing growth, and falls from the ranks of growth stocks, you’re going to see a sharp fall in the share price.
Right now in the United States, its growth drivers of demographics and productivity growth are slowing. As they continue to slow, economic growth will decelerate.
And our growth obsession won’t be fulfilled… It won’t be easy for anyone. But then, America will just be joining the rest of the world.
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Editor, American Consequences
With Editorial Staff
January 18, 2021