US Demographics not as Strong as Widely Believed

A recent op-ed in the Wall Street Journal by Mr. Ben Wattenberg, a senior fellow at the American Enterprise Institute, takes an optimistic view on US demographics and on their likely impact on the economy.  The WSJ today published my response in which I repeat the argument I made in America Heading Towards Zero Population Growth? that the growth of the US population is in a multi-decade decline.

Text of my letter:

“Regarding Ben J. Wattenberg’s (“Immigrants and ‘Comparative Advantage’,” op-ed, Aug. 9): It is true that the U.S. is in better shape than Europe or Japan, but the rate of growth of the U.S. population has fallen below 1% per year and will decline further over the next four decades. Due to the passing of baby boomers in increasing numbers, the two decades starting in 2030 will see no population growth except for immigration.

Mr. Wattenberg’s figure of 400 million Americans in 2050 is too high and would be reached only if the birth rate, life expectancy or the number of immigrants rises significantly in coming decades. My own estimate is 375 million in 2050, which is 61 million more Americans than we have today. This may appear nominally attractive, but the population grew by 60 million, or 24%, in the 22 years since 1990. A 60 million increase by 2050 would be equivalent to growth of only 19% in 38 years.

Even Mr. Wattenberg’s optimistic scenario would be growth of 27% in 38 years, a rate which is well below that of recent decades, with predictable consequences for domestic consumer demand.”

End of letter.

Mr. Wattenberg is not alone in holding an optimistic view.  In fact, robust population growth is seen by many as one of the unique assets of the US economy.  Last month, Goldman Sachs CEO Lloyd Blankfein argued that US economic prospects look promising in part due to demographics:

“The U.S. has a number of major competitive advantages that we sometimes overlook — especially given the focus of the 24-hour news cycle on sensational, and mostly deflating, events. First, the U.S. has favorable demographics — thanks to its relatively high birth rates and immigration. While the BRIC countries — Brazil, Russia, India and China — have generated extraordinary economic growth, the U.S. remains a magnet for many of the smartest, most ambitious people in the world. […] Immigration is one of the main reasons why the U.S. has grown faster than many other developed economies. The growth in the foreign-born population contributed roughly 30 percent to 40 percent of total U.S. population growth from 1980 to the mid-2000s. New immigrant workers provide a boost to economic growth. Just think about the effect new workers have on demand for housing, let alone creating new businesses.”

Because they are only partially accurate, some of these comments end up painting an overall picture which is too optimistic. First on the birth rate, it is higher than that of Japan or Europe, but it had been until recently near replacement level, equivalent to a total fertility rate (TFR) of 2.1 children per woman.  But since the financial crisis  began in 2008, the TFR has fallen below 2.1, as recently reported by The Economist. The TFR may well recover to replacement level as the economy improves. That is better than sub-replacement but a TFR of 2.1 is not sufficient to turn demographics into a source of economic strength. In addition, discussing birth additions without mentioning death subtractions presents only half of a full picture.  As increasing numbers of baby boomers pass away in the next three decades, the population will grow at a slower rate than in recent decades.

Another factor to consider within the overall population numbers is the evolution of each age group.  The expected increase in the number of older people has been widely documented and discussed, in particular as it relates to the pressure it will place on government social programs. A subsidiary measure of this development is the rise of the dependency ratio, which is the number of dependents (children and retired people) per working adult. In the US the ratio had been declining for decades and it is now set to start rising. (See Our Growing Inactive Population).

Turning to immigration, it is true that the US could open its doors wider to more immigration and by doing so, reach any population level that it wishes. But few commentators or politicians are advocating this approach. If we continue with the current run rate of 1 million new (legal) immigrants per year, the growth rate of the US population will continue to decline. And that would be true even if we raised annual immigration to 1.5 million newcomers.

There is nothing wrong with being too optimistic on demographics except that it could prevent policymakers from considering other steps to promote economic growth. If there is a widespread belief (as seems to be the case) that population growth will be a strong driver of the economy, we may forego some other growth-boosting measures which are in fact necessary.

In my opinion, growth for the US economy in the next few decades has to come from two main engines, first the perennial innovation engine, and second the manufacturing and export engine. The US can become once again an export powerhouse, not just in agriculture and technology, but also in other manufactured products along the entire value-added chain. Whether this requires a dramatic devaluation of the US dollar remains to be seen. If such is the case, we would not be the only country racing for a depreciated currency. Europe certainly does not want to see a stronger Euro, and if the Euro breaks up, virtually all countries except for Germany, Finland (and possibly France) will end up with currencies which are relatively weaker than the Euro. Germany may end up with a new Deutsche Mark which like the Swiss Franc will be stronger than its exporters would like to see.

Repatriating as many manufacturing jobs as possible and searching for new markets overseas are likely to be two important elements of a future growth strategy. Based purely on demographic trends, India and Sub-Saharan Africa look especially promising because improving health care and declining fertility rates (the two go hand in hand) could possibly yield the same kind of very large demographic dividend which we have seen in China and other Asian countries in recent decades.

LA Times: Beyond 7 Billion

KENNETH R. WEISS at THE LOS ANGELES TIMES explores the Population Boom in a five-part series:

After remaining stable for most of human history, the world’s population has exploded over the last two centuries. The boom is not over: The biggest generation in history is just entering its childbearing years. The coming wave will reshape the planet, and the impact will be greatest in the poorest, most unstable countries.

Part 1: The biggest generation

England and Wales: Population Grew 7% in the Past Decade

LIZZY DAVIES writes in the Guardian that the population of England and Wales grew by 3.7 million people in the decade to 2011. This represents total growth of 7%, or 0.69% per year. Davies notes that “one of the most striking aspects of the census is the rise in the number of over-65s, who now make up one in six of the population of England and Wales.” She also writes that “the median age in England and Wales was 39 [in 2011] – compared with 25 in 1911”.

(The Wall Street Journal notes in a separate article by Marcin Sobczyk that much of the UK’s population growth can be attributed to new immigrants from Poland: “Poland’s own national census, published earlier this year, showed the country bleeding its permanent residents. Nearly two million Poles resided permanently outside their country in 2011, and departures over the past decade reduced Poland’s population to 36.6 million in 2011 from 37.4 million in 2002… Nearly a third of Polish emigrants lived in the U.K., the Polish census showed. Britain was much more popular for Polish expatriates than Poland’s neighbor Germany, the destination for about a fifth of Polish emigrants.”)

Lizzy Davies’ Guardian article begins here:

The population of England and Wales has grown by 3.7 million over the last decade, the biggest increase documented since census-taking began in 1801, according to new figures.

The first tranche of findings from the 2011 census illustrate how longer life expectancy, migration and higher fertility rates have caused the number of residents to boom. The figures show that the population of England and Wales on 27 March 2011 was 56.1 million compared with 52.4 million in 2001, the year of the last census. The population of northern Ireland, according to results also released today, was 1.8 million.

Although the official Scottish results will not be released until later this year, Glen Watson, director of the 2011 Census, said that, based on an estimate from earlier this year, the new figures would take the UK’s total population to 63.1 million. READ MORE.

Germany: Number of Births Hits Post-War Low

A third of all babies born in Germany, still the EU’s most populous member state, came from immigrant families, the analysts said, noting that without them the overall figure would have been much lower.

FROM REUTERS VIA CNBC:

BERLIN (Reuters) – The number of births in Germany fell to a post-war low last year despite government incentives meant to reverse a population decline in the European Union’s biggest economy, and analysts blamed a lack of sufficient child care support.

A third of all babies born in Germany, still the EU’s most populous member state, came from immigrant families, the analysts said, noting that without them the overall figure would have been much lower.

The preliminary data released by Germany’s Federal Statistics Office showed 663,000 children were born in 2011, down from 678,000 in 2010.

“As in every year since 1972, the number of people who died was greater than the number of children born. In 2011 the difference amounted to 190,000 people and in 2010 to 181,000,” the office said in a report. READ MORE.

Korea Herald: Population Will Surpass 50 Million this Saturday

AN EDITORIAL TODAY IN THE KOREA HERALD SAYS:

Korea’s population including foreign residents is projected to surpass 50 million this Saturday. It is estimated to peak at 52.16 million in 2030 before declining gradually to 49.81 million in 2045, according to a projection by Statistics Korea.

It took about half a century for the country to double its population, which stood around 25 million in the early 1960s.

Korea now accounts for 0.71 percent of the world population, up from 0.61 percent in 1983 when its population topped 40 million.

Coupled with its per capita income above $20,000, the landmark population figure appears to give Koreans some sense of pride about their achievements over the past decades.

Local media has shed light on Korea becoming the seventh country with a population of over 50 million whose per capita income exceeds $20,000. READ MORE.

US Demographics and Housing

Expectations of a robust housing recovery are not well supported by US demographics.

From Bloomberg News (February 8, 2012): Chief Executive Officer Jamie Dimon told investors and analysts in a January conference call that housing is “getting closer” to a bottom. “We’re going to add 3 million Americans every year for the next 10 years. That’s 30 million Americans who need 13 million dwellings,” he said.

Mr. Dimon’s estimate looks too optimistic on two accounts.  First, the US population will more likely grow by 23 to 26 million in the next 10 years.  And second, the demographic bracket which includes over 80% of home buyers will grow at a much lower rate.

The US population grew by 2.8 million people in the sixteen months from April 2010 to July 2011, but over 700,000 of these 2.8 million were new immigrants.  In the remainder of this decade, the population will grow by an average of 2.6 million people a year, assuming a more typical 1 million new immigrants per year.  My estimates are derived from data compiled by the Center for Disease Control (which tracks life expectancy among other things) and by the US Census. In the next decade 2020-29, the population will grow by an average 2.3 million per year and in the following decade by 0.9 million per year, again assuming 1 million new immigrants per year.  Note that without immigration, the population would shrink in 2030-39 and in 2040-49, as I argued in America Heading Towards Zero Population Growth?.

It is not enough to tabulate the number of new Americans (newborns or immigrants) to estimate the likely impact on housing.  We have to also look at the likelihood that they are in an age segment and in an economic bracket that will lead them to spend a fair amount of money on a home, regardless of whether they are renting or buying.  An ideal scenario would be a large increase in the population segment of young and middle-aged Americans who can be characterized as middle-class or richer.  But this scenario is unlikely in the next decade.

Of the 2.6 million annual addition to the population in the present decade, 4.2 million will be from new births and 1 million from new immigrants.  And because there will be 2.6 million deaths, the sum total of these three figures comes to a 2.6 million (4.2 + 1 – 2.6 = 2.6) addition.

The US Census recently disclosed that foreign-born households are made up on average of 3.4 people, more than the 2.5 people average for native-born households. Assuming new immigrants are in similarly-sized households, one million immigrants would absorb about 294,000 dwellings per year. Incidentally, there were only 700,000 immigrants in 2011, equivalent to a demand for 206,000 units.

Outside of immigration, the annual growth in population in the present decade will be 1.6 million.  Babies don’t buy homes but growing families with new babies may do so because they need more space.  In this case however, they are vacating one home and moving into another, resulting in a net demand of zero in terms of units (say trading a 3 bedroom for a 4 bedroom home) and a subdued net positive demand in dollar terms (say trading a $250,000 home for a $300,000 home).  At the other end of the age spectrum, older people who pass away often leave a home vacant, adding to the supply of existing homes for sale.  The demand for upgrades is debatable but the supply from deaths is certain, resulting in a murky overall supply-demand situation.

A better way to look at the demand is to estimate the size of the population of people who are likely home buyers.  75% to 80% of home buyers are in the 30 to 60 age bracket (see footnote). The remaining 20% to 25% of home buyers are aged less than 30 or more than 60 and are generally buyers of smaller homes. In terms of dollar value, the 30-60 bracket could therefore represent as much as 90%+ of the residential real estate market. This bracket now has about 125 million people but it has stopped growing (excluding new immigration) in 2005 and will not resume its growth until after 2020.  If the overall pool of likely home buyers is not growing, then people are just trading homes amongst themselves without any significant net gain in overall demand for new homes. Upsizing by growing families could be largely matched by downsizing from older couples whose children have left home.

Therefore if you assume no demand from existing residents and demand of 294,000 homes from new immigrants, the total net demand in the next ten years would be around 3 million units, far fewer than the 13 million estimated by Mr. Dimon. Total home construction will probably exceed this 3 million figure because of some demolition of older homes and because supply and demand are often not in the same location.  Florida or Texas may see net demand while some other regions see net supply.

Some attention has been given to other measures of demand such as housing affordability and the rate of household formation. The National Association of Realtors said in March that the housing affordability index rose above 200 for the first time since recordkeeping began in 1970. An elevated index is an indication of high affordability.  But in any transaction, there is the ability to buy and the need or desire to buy. The affordability index shows that the ability to buy is strong but it is not indicative of the need to buy. If people are already in homes and there are few incremental buyers, housing affordability is not an indication that demand will soon return. If the index is high because demand is muted and interest rates are low, it does not follow that greater demand will inevitably return. That would only be true in the context of favorable demographics such as we have had in previous recoveries.

As to household formation, it is still low but seems to have bounced in the first quarter.  It declined after 2007 because of a fall in the divorce rate and because more young people stayed under their parents’ roofs.  The youth unemployment rate has recently been improving, raising expectations that household formation will also recover. But even during the good times, the young demographic contributes a relatively small demand in terms of units and an even smaller demand in terms of value (since they tend to live in smaller and less expensive housing). Furthermore, counting the young people who enter the house-buying age bracket and neglecting to count the older people who simultaneously leave this bracket only presents half of a full picture.

Outside new immigration, there will be little demand for housing from demographics until the end of this decade.  When the 30-60 age bracket starts growing again in the 2020s, housing demand will grow again but it will be weaker than in 1985-2005 and will have to contend with the new supply of homes vacated by rising numbers of dying or downsizing baby boomers.

As to the exchange-listed home builders, two factors may work in their favor despite the poor demographic backdrop. One is that real estate is famously local, which means that, with sufficient research, they may be able to focus on areas of the country which are growing even in a time when the overall market is not.  For example, some parts of Florida or Texas may see more demand than supply while some regions in the Midwest or Northeast see more supply than demand. The second factor is the trend towards urbanization with more people choosing to live in cities instead of suburbs. In this vein, several home builders are shifting some of their focus to multi-family developments.

The main risk to these forecasts arises from the difficulty in assessing the impact of illegal immigration. It clearly contributes to some incremental demand, perhaps not in the early years after a person’s arrival, but certainly after a few years. But here again, the data is mixed because, as noted by the Pew Research Center, the inflow from Mexico has recently reversed for the first time.

Footnote: The National Association of Realtors publishes every year a Profile of Home Buyers and Sellers. The Profile is compiled from responses to a survey which the NAR mails to tens of thousands of consumers who purchased a home during the period under study, usually July to June.  For 2010, the NAR mailed 111,004 surveys and received 8,449 responses, or 7.9%, and for 2011, it mailed 80,099 surveys and received 5,708 responses, or 7.3%. It is not clear whether these samples are large and diverse enough to be representative of all home buyers. It is possible, or perhaps even probable, that the profile of survey respondents differs markedly from that of home buyers in general. Notwithstanding the methodology, the 2011 Profile shows a marked jump in the average age of home buyers from 39 in 2010 to 45 in 2011.  This jump is directly related to the expiration of the first-time home buyer tax credit which was still on offer in 2010 (and 2008-09) but not in 2011.  Although the age distribution of buyers in 2010 showed a large percentage in their twenties, we view this as a discrepancy caused by the tax credit. In addition, it is very likely that the current historically very low mortgage rates have skewed the age distribution towards younger age groups.  We are comfortable with our estimate that, under normalized circumstances, 75 to 80% of home buyers are in the 30 to 60 age bracket.

New Zealand: Population Growth Lowest in Ten Years

Geoff Bascand, Government Statistician in New Zealand, issued the following media release yesterday. In addition to the same demographic challenges faced by the United States and other developed economies, New Zealand also has to contend with net outmigration (more people leaving than entering the country):

New Zealand’s population was 4,430,400 at 31 March 2012. The population grew by 0.6 percent (27,700) in the last year, Statistics New Zealand said today. The population growth is the lowest for a March year since 2001, when the population increased 0.5 percent (21,000).

An excess of 31,100 births over deaths (natural increase) caused population growth during the March 2012 year. There was a net migration loss (departures exceeded arrivals) of 3,400. “A combination of fewer births, more deaths, and more people leaving New Zealand has resulted in the country’s lowest population growth since 2001,” Population Statistics manager Andrea Blackburn said.

Our population continues to age. There were proportionally more people aged 65 years and over in the population at 31 March 2012, 14 percent compared with 12 percent in 2002. In contrast, the population aged less than 15 years decreased from 22 percent to 20 percent.

Those aged 65 and older now exceed 600,000, a number set to rise. Within the older age group, those 80 years and over are the fastest growing group. “In the next 40 years, the number of people aged 80 years and over is expected to more than triple from 160,000 to exceed half a million,” Mrs Blackburn said.

US Census Report: The Foreign-Born Population in the United States

The US Census Bureau released new information on foreign-born households in America from its report The Foreign-Born Population in the United States: 2010.

The U.S. Census Bureau reported today that foreign-born households are, on average, larger than native households, have more children under age 18, and are more likely to be multigenerational.

The average size of foreign-born households (3.4 people) was larger than that of native-born households (2.5 people). About 62 percent of foreign-born family households included children under 18, compared with 47 percent of native-born households. Multigenerational households, with three or more generations living together, were more common among foreign-born (10 percent) than native-born (5 percent) family households. read more.

In addition to the report [PDF] released today, the Census Bureau recently released three briefs about the foreign-born population: The Newly Arrived Foreign-Born Population of the United States: 2010 [PDF], The Foreign-Born With Science and Engineering Degrees: 2010 [PDF] and The Foreign Born from Latin America and the Caribbean: 2010 [PDF]. These briefs, based on 2010 American Community Survey results, also provide a look at the differences in the characteristics of the foreign-born. A complete list of all Census Bureau publications on the foreign-born population in the United States is accessible here: http://www.census.gov/population/foreign/.