Why Demographics Will Keep the U.S. Ahead
By J. Randall McLaughlin, CFA
Portfolio Manager,
"Demographics explain two-thirds of everything."
—David K. Foot, Professor of Economics, University of Toronto and author of Boom, Bust & Echo
Demographics can be a powerful force on the economy and have important investment implications. These forces are often slow to develop and can exert themselves over decades. Factors such as life expectancy, fertility rates, net migration and the age and composition of the workforce all help shape movements in the global economy. The aging of the “baby boomers” is an undeniable force that the United States is dealing with. However, relative to other areas of the world, the demographic profile of the United States is positive, being driven by high fertility rates and positive net legal immigration.
One of the most influential demographic factors is population, specifically the growth and age of the population. Growing populations buy more goods and services, form more households and are well-positioned to take care of previous generations. Currently, half of the world lives in countries with birth rates that are below replacement levels.
U.S. Demographic Profile vs. Europe, Japan, Russia and China
The United States has a very good demographic profile, with the highest fertility rate in the developed world. Fertility measures the average number of children born to a woman if she survives from birth to the end of her reproductive life. Couple this with strong legal immigration and the United States is in very good shape.
In contrast to Europe, which is seeing a population decline, we have a growing population with continued growth in the working-age population. In addition, a consistently low fertility rate and lack of immigration have left Japan in the position of having an aged population that is straining the country’s ability to care for it.
Russia too is in difficult shape due to a low life expectancy. According to noted demographics expert Dick Hokenson of ISI Group, Russian children born today are twice as likely to die at an age younger than their parents. This is in sharp contrast to the worldwide statistics that indicate that 50% of the children born today will reach the age of 100. This is driven by high rates of alcoholism and suicide.
For China, its one-child policy and years of emigration have left the country in a precarious situation. China has a rapidly aging population, no social safety net and more sons than daughters that are unlikely to care for their aging parents.
Industry Outlook
The aging of the developed world does give us some powerful information about which industries might do well in the future. The increased use of healthcare services as a population ages is well-documented. In addition, as people age, they transition from accumulating possessions to using their wealth to buy experiences. Travel companies such as Priceline, InterContinental Hotels and Las Vegas Sands are examples of companies that could benefit.
The favorable demographic profile of the United States supports our manufacturing renaissance thesis as companies tend to want to locate manufacturing close to the end client. This would help companies such as Fastenal, Roper Industries and Rockwell Automation.
“Never Wrong – Just Early”
The old saying is that when you are using demographics to make investment decisions, you are never wrong - just early. We believe these powerful forces will help shape the investment landscape for years to come.
© Baird Investment Management
www.bairdinvestmentmanagement.com
