Financial advisors are no strangers to changing demographics. Many are aging along with their client base and are well aware of the challenges for succession plans when they retire. But until that time, advisors need to understand how demographic changes are affecting the broader economy and financial markets as well as their own business.
“Demography is overwhelmingly the most important issue for the macro economy and capital markets in developed countries,” says Chris Brightman, chief investment officer of Research Affiliates.
He explains that population growth, which has been around 1% in the developed world, is declining. “Japan’s population has shrunk; Europe’s is near flat and in U.S [population] growth is now about 0.6% or 0.7% and will be 0.5% in the future,” Brightman tells ThinkAdvisor.
Slower population growth means slow economic growth simply because fewer people are working. That demographic along with an aging workforce, which tends to be less productive, is another bearish factor for the economy, says Brightman, noting that productivity peaks at age 50.
Given these two major demographic trends “getting back to 3% to 4% economic growth like we had in the ‘70s or ‘80s is never going to happen,” says Brightman.
For Mark Zandi, chief economist at Moody’s Analytics, the “biggest problem” for the U.S. economy going forward is not “unemployment but a lack of labor.” Indeed, the October jobs report released on Friday showed the unemployment rate falling to 5%, the lowest level in seven and a half years, and the labor participation rate unchanged at 62.4%, remaining at a 38-year low.
In the near term this shortage of labor could boost wages, helping hourly workers and others at the lower end of the pay scale, but it could also hurt stocks, shrinking the profit margins of companies that have to pay steeper labor costs, says Zandi. Longer term, he says a shortage of workers could “exacerbate our fiscal problems” since fewer workers will be supporting a rising increasing number of retirees.
The 2015 Social Security Trustee’s report projects 2.6 workers contributing to Social Security per retiree by 2030, and just 2.2 if disability benefits are added in. In 2000 the figure was close to 4 workers per retiree.
Both Zandi and Brightman tell ThinkAdvisor that increasing immigration of skilled workers could help offset these demographic trends but admit that such a change in policy is not politically possible now. Longer term, however, Zandi says U.S. immigration policy could change because “businesses will start screaming and the political opposition will fade.”
Despite these pressures and slower future growth, both Zandi and Brightman are optimistic about financial markets and they are not concerned that retiring baby boomers withdrawing assets from their retirement accounts will harm markets.
U.S. stocks especially are a big drawer for investors outside the U.S., says Zandi. “As large populations in the rest of the world become wealthier they will want to own a piece of the U.S. stock market.”