Weekly Relative Value - Debt Trap

Weekly Relative Value, by Tom Slefinger, Alloya Investment Services, takes a look the impact of world economics on your credit union's balance sheet. It is provided in partnership with Alloya Corporate Federal Credit Union. The views of the author do not necessarily reflect those of the Cooperative Credit Union Association.

By Tom Slefinger, Alloya Investment Services

“If you’re worried about the short-term economic outlook, I have bad news: the long-term outlook is worse. That’s what emerges from the latest long-term budget outlook released by the Congressional Budget Office… It contained this sobering number: the agency expects annual economic growth to average just 1.6% over the next three decades—down by about a quarter of a point from its forecast a year ago—and just 1.5% by the 2040s. The U.S. hasn’t had trend growth that slow since the 1930s. Only a bit of this is because of the pandemic. Most reflect longer-lasting forces, namely demographics and productivity.” – Greg Ip, Wall Street Journal

The above excerpt was taken from Greg Ip’s Wall Street Journal column, Demographics and Debt Hang Over Long-Term U.S. Growth.

It sounds familiar, does it not? For the past decade I have argued that U.S. growth, inflation and interest rates would remain “lower for longer” for the same reasons that Mr. Ip highlights in the above excerpt. While I am well aware of the risk of “confirmation bias,” I believe that Mr. Ip is on the money.

Let me once again review the case for “lower for longer.”

First, there is absolutely no doubt that the U.S. is aging fast and the labor force is contracting. Since 1980, the average life expectancy has increased by eight years. On the other side of the ledger, the Congressional Budget Office (CBO) is projecting that the fertility rate will decline to 1.6 next year. If so, this would represent the lowest fertility rate in the past 100 years. More importantly, this rate would be well below the 2.1 rate at which each generation exactly replaces itself. Such low births translate into fewer people entering the labor force 20 years later.

Historically, the U.S. labor force (22 to 64-year-olds) has increased by 1.2%. Currently, the labor force is expected to grow at only 0.2% for the next decade. This will be the lowest growth in the labor force ever. And it’s too late to fix the secular downtrend in the labor force. You can’t buy babies on Amazon… Demographics are more or less set in stone.

So, without a growing labor force, the U.S. will have to rely on productivity gains to increase economic growth. Unfortunately, as shown below, productivity has been waning over the past decade and is also expected to fall over the next decade to 1%, or 50% lower than productivity gains realized in prior decades.