Unless the U.S. makes politically difficult changes in immigration, employment and investment policies, Americans should expect a long-term “new normal” rate of growth of just 1%. So says investment management firm Research Affiliates, in a research note that brings a wealth of demographic and historic data to bear on current fiscal projections.
Christopher Brightman, the report’s author and head of investment management for the Newport Beach, Calif. Firm founded by indexing guru Rob Arnott, is critical of White House and Congressional Budget Office growth projections that assume 2.5% long-term growth.
Indeed, Brightman views the White House’s higher, 4% growth assumption for its proposed recovery years of 2014 to 2017 as rosy scenarios of the sort Ronald Reagan’s budget director David Stockman derided in the 1980s after leaving the administration.
Brightman argues the U.S. will find it nearly impossible to recapture the 3.3% average annual growth that prevailed from 1951 to 2000 as a result of negative trends in the key areas that affect GDP: population growth, employment rate growth and productivity.
Citing, and critiquing, Census Bureau data, the Research Affiliates paper forecasts population growth to slow to 0.7% going forward, or half the prevailing rates of the latter half of the 20th century. The Census Bureau, in its low immigration (i.e., worst-case scenario), expects the population growth rate to decline to 0.8%.
But Brightman points out that we have yet to see the full effects of the Great Recession, noting that the Great Depression cut a previous 1.5% rate of population growth of the first decades of the 20th century down to 0.7%.
Preliminary figures from the Centers for Disease Control on births and fertility are in line with the notion that we will again see a population growth plunge: 2011 births were 1% less than in 2010, and the fertility rate has “declined to the lowest rate ever reported for the United States,” Brightman quotes the CDC as saying.
Immigration figures are also starkly negative. A Pew report on Mexican immigrants shows that 3 million Mexicans moved to the U.S. from 1995 to 2000 while 700,000 moved from the U.S. back to Mexico. In contrast, just 1.4 million Mexicans entered the U.S. from 2005 to 2010, and the same number returned home in those years.
When it comes to employment levels – currently 58% (in 2010) compared with a rate of 64% in 2000 – demographic headwinds are greater reason for concern than any temporary recession-based effects. Brightman notes that the over-55 proportion of the population was just 18% in the 1970s, but has quickly risen to 25% today and is expected to rise to 31% by 2030.
That means the total employment rate is going down, and Brightman says current trends are sufficient to shave off 0.2% per year in GDP growth “over the next two decades as boomers move into their retirement years.” He adds that while long-term population growth rates are speculative, the near-term figures he bases his projections on are “highly reliable” since we can closely estimate next year’s batch of 65-year-olds based on this year’s number of 64-year-olds.