Monday, June 19, 2017

Why The Next Recession Will Morph into a Decades Long Depressionary Event...Or Worse

Economists spend inordinate time gauging the business cycle that they believe drives the US economy.  However, the real engine running in the background (and nearly entirely forgotten) is the population cycle.  The positive population cycle is such a long running macro trend thousands of years in the offing that it's taken for granted.  It is wrongly assumed that upon every business cycle downturn, accommodative monetary and fiscal policies will ultimately spur greater demand and restart the business cycle once the excess capacity and inventories are drawn down.  However, I contend that the population cycle has been the primary factor in ending each recession...and this most macro of cycles is now rolling over.  Without this, America (nor the world) will truly emerge from the next recession...instead it will morph into an unending downward cycle of partial recoveries...contrary to all contemporary human experience.

The evidence for my contention begins with the annual change in the 25-54yr/old US population (brown line below), which peaked in the late 1980's, turned negative in 2008, and has again turned negative in 2017 (this population is presently about 400k fewer than Dec of '07).  The impact on employment among the largest and most influential segment of the US economy, the 25-54yr/olds, has been zero net job growth since 2007.

The annual change in 25-54yr/old US population (blue shaded area) rose, peaked in the late 1980's, and went negative in 2008 (& negative again in 2017) vs. annual changes in total full time US employees (black shaded area, chart below).  The macro core population cycle provided millions of new adults (consumers) and their increased demand restarted the more frequent gyrations of the micro business cycles...until 2008 and again now in 2017.  Some may take note that the Federal Reserve cost of money (the Federal Funds Rate, yellow line) generally followed the population cycle, only making some deviations for the business cycle along the way.  The ZIRP enabled and encouraged massive federal debt growth (red line).

But the change per 8 year periods of the 25-54yr/old population and total US full time employment turns out to be not so dissimilar.  In fact, it's a pretty nice correlation.



Without the growth of the core population (and employment among them), interest rate cuts and debt were substituted to maintain the appearance of growth.  The chart below shows federal debt, on a per capita basis, against the quantity of 25-54yr/old employees.  Unfortunately, real median household income, the increased ability to pay for that debt, has absolutely stalled.
And so, since population growth means so much...two differing views on where this population is headed.  In red, the Census and in black, an unbiased view of growth based on the child bearing population, birth rates, and current and future immigration trends.
Why would I feel such confidence in a lowered estimate of growth?  Check the '08 Census projection for the 0-24yr/old US population through 2050 (blue line, chart below) and the massive downgrade of growth by the 2014 projection update (red line).  And it is still far too optimistic and the upcoming projection update will only further downgrade upcoming population growth, based on the ongoing declining birth rates combined with huge declines in illegal immigration since '09.
But if we widen out to the 15-64yr/old population vs. US full time employees...the chart below details both sets.

Taking a look at the annual 15-64 population growth should be pretty telling.  2008 wasn't a debt crisis...it was an end of an atypical period of abnormally high growth which so many had assumed was in fact "normal".

Charting the change in the core population of the US vs. full time employment.  During each downturn in full time employment, the growth in the core population continued and eventually pulled the business cycle to a fresh start.  However, as the population cycle slowed the downturns were deeper and recoveries slower due to minimal growth in demand from the population cycle.
Below, focusing from the turn of the century 'til now, the downtrend of core population growth is very plain and the negative impact on the business cycle should also be easily understood.  The expected Federal Reserve response is of course interest rate cuts to incent record quantities of new debt...to maintain the unsustainable present.  The next economic downturn will see no buoying impact of the core population growth to exit the downturn.Anyway, the chart above makes it plain that the population cycle of the broad core of the US (and in fact, that of the 0-64yr/old population) is now on the precipice of turning Japanese...also known as depopulating (see chart below).
The next business cycle recession will be unending and is very likely to run years into decades and perhaps a century or more.  A declining population already indebted with record debt and zero interest rates will consume less...meaning overcapacity and excess inventories will never be fully cleared before the next downturn...and on and on and on.

But the absence of a growing consumer base isn't just a US issue...this is a global problem.  The annual growth of the 0-64yr/old population of the combined OECD nations (most the EU, US, Canada, Mexico, Chile, Japan, S. Korea, Australia / New Zealand) plus China, Brazil, and Russia show the growth that has driven nearly all economic growth has come to an end...and begins declining from here on.  And when importers are shrinking, exporters have no one to export to...and on and on and on.  A recent article helps to detail the depopulation we are now facing...not simply a demographic issue that so many believe, HERE.
The end of growth is the start of the SHTF scenario in which we now find ourselves.  While this situation offers short term nirvana to investors, the economic repercussions are ultimately disastrous.