Notes on the week aheadContributor Dr. David Kelly
Reversing the Population Pause
It always requires discipline to look beyond the next few weeks and months and take a long-term view. In the short run, investors remain focused on election uncertainty and how the once-again worsening pandemic, combined with stalemate over further fiscal stimulus, threatens to dramatically slow the pace of economic recovery, following a strong third-quarter bounce.
But while the short-term outlook is grim, a medium-term view can be more optimistic. Over the next few months, political tensions should diminish and Washington will likely take significant further steps to aid workers, businesses and state and local governments until the pandemic is brought to an end. We can also hope that a safe and relatively effective vaccine will be found and that the public, chastened by the experience of this terrible year, will be more united in following the guidance of public health officials to allow us to get back to normal life.
At that point, however, we will have to reckon with the many costs of the pandemic. The most tragic cost, of course, is in lives lost. Beyond that, however, there will be businesses closed that will never come back and personal finances that will be hard to repair. We estimate that real GDP, even after a sharp bounce in the third quarter, will be 3.0% lower than at the start of the year and roughly 5% lower than it would have been had the pandemic never occurred. While employment has bounced off its lows, it is still down 10.7 million jobs from February, wiping out all of the job gains since June 2015.
And there is the fiscal bill. On Friday, the Treasury Department announced a deficit for the fiscal year just ended, of over $3.1 trillion, boosting the national debt to just over $21 trillion, higher, as a percentage of GDP, than at any time since the immediate aftermath of World War II. This will likely rise further in the months ahead, as additional stimulus is approved by Congress.
In short, when the war against the virus is over, we will have much to repair and rebuild. Our success in doing so will depend, to a large extent, on the overall pace of economic growth we are able to achieve and maintain. This, in turn, will depend in part, on demographics, that is to say, our ability to supply the additional workers and consumers that has been a traditional strength of the U.S. economy. Here too, however, a recovery will be necessary.
Relatively strong population growth has always been an advantage to the U.S. economy relative to its developed country counterparts. Indeed, in the first 15 years of this century, average annual population growth in the U.S. was 0.9%, compared to 0.6% in France, 0.4% in Italy and essentially no growth at all in Japan or Germany. This solid U.S. population growth, of course, added to the demand for houses and cars and appliances. It also, importantly, allowed for a growing workforce and tax base, slowing the deterioration of the public finances.
In recent years, however, U.S. population growth has slowed and has now nearly ground to a halt in the midst of the pandemic. This is a result of three separate trends. Note that, due to annoying Census Bureau record keeping, the numbers that follow refer to years ending in June 30th.
First immigration has slowed.
Between 2000 and 2015, net immigration to the U.S. averaged roughly 900,000 people per year, accounting for 35% of our overall population growth. From a purely economic perspective, this was particularly advantageous, since new immigrants are more likely to be in their young working years than the native-born population. Indeed Census Bureau projections for 2017 showed that while just 23% of the overall population was between the ages of 18 and 34, 55% of net immigration fell into that age group. However, since the middle of the last decade, a number of factors, including tighter restrictions on legal immigration, have reduced annual net immigration to just under 600,000. Based on visa applications, we believe that the pandemic may have cut this number to below 400,000 in the year ended June 30th, 2020 and to just 100,000 in the year that will end on June 30th, 2021.
Second, births have fallen. After peaking in 2015 at 4.0 million, the number of babies born in America has fallen every year and numbered just under 3.8 million in the year ended in June 30th 2019. Sociologists expect that the uncertainty caused by pandemic will further cut birth rates and while, for obvious reasons, this won’t have any impact in 2020, we expect to see a further sharp decline in the year ended June 30th, 2021, perhaps to as low as 3.6 million.
And third, there is the death toll from the pandemic itself. Every year, as the American population grows and ages, the number of deaths rises, climbing from 2.700 million in 2015 to 2.835 million in the year ended June 30th, 2019. Given the toll from the pandemic so far, it is likely that total deaths rose to roughly 3.0 million in the year ended June 30th, 2020 and could reach close to 3.2 million in the year that will end on June 30th, 2021.
Adding all of this together, as we show on page 29 of our Guide to the Markets, annual population growth may have slipped from roughly 2.3 million people per year in the middle of the last decade, to just 1.2 million in the year ended June 30th, 2020 and as little as 500,000 in the year that will end June 30th, 2021.
In 2022 and beyond, births and deaths in the United States will likely resume their recent trends. However, we will not be able to recover most of the lost ground in terms of the natural growth rate of the population. This makes immigration an even more important issue in driving economic growth for the rest of the decade. Because of the aging of the baby-boom, the working age population, would, in the absence of net immigration, fall by roughly 0.2% per year through the end of this decade. Consequently, a restoration of immigration to the pace of a few years ago would seem like a prerequisite to achieving faster economic growth. Without it, the U.S. would likely face a worsening of its fiscal position leading to higher taxes and bigger spending cuts.
Investors should, consequently, keep a close eye on this issue both in thinking about U.S. fixed income investing and in allocating between the U.S. and overseas markets.
In recent years, immigration has become an emotive political issue and no one benefits from the illegal status of millions of immigrants today. Our history and our humanity demand that we treat all people with respect and kindness while still securing our borders and processing applications for immigration in an orderly and efficient way. We can hope, if political tensions ease in the wake of the election, that we can finally make progress on this issue, in the form of a long-overdue comprehensive immigration reform bill. But as we do so, we should recognize the value that immigrants have always brought to our shores. Part of repairing and rebuilding America will depend on, once again, welcoming the young, talented and energetic immigrants who have always provided an extra spark of vitality to the American economy and society.