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Demographics, Deficits & Deflation

Secular trends are conspiring with the Pandemic to reduce demand in the US. Favorable demographics should enable higher productivity and constrain inflation. In contrast, expanding debt service and higher tax rates will crimp future growth while declining household formation further slows demand. Future policy choices' precision is irrelevant to the greater need to avoid a change of consumer behavior that a continuing Pandemic may bring. A newfound thrift by consumers from the Pandemic would further slow growth and is unnecessary. Policy action is required to avoid a decade’s long impairment of consumption. Best pay now, rather than a higher bill later.


Favorable trends in US demographics are placed at risk by the Pandemic response. An effective fiscal response would avoid a debt-deflation spiral and a lost generation.

As expected, the third quarter was the most significant increase in growth on record. A low bar augmented this outcome. Yet, this current contraction remains deeper than the Great Recession in 2009. The next few months are pivotal as winter is coming with material implications for the Pandemic. Needlessly constrained fiscal policy and monetary policy without further ammunition implies that a second wave may have little policy support unless the pending election brings an aligned government to Washington. The forlorn economy awaits the election resolution for any policy responses.

During the interregnum, the economy may get worse before a fiscal lifeboat can arrive. A change of Washington's administration would leave a lame-duck senate and executive office with little incentive to act. Particularly when they can point to a $1.2 trillion rebound in the third quarter (exhibit 1). As with numbers, they require context. A ten percent decline followed by a seven percent increase still leaves you nearly four percent below output's prior peak. Current growth has slowed in recent months, and a high previous quarter will ensure growth is not as rapid again. The challenge is determining the future growth rate, a devilishly hard task.

Exhibit 1. GDP Contribution by Component

Source: Federal Reserve Economic Database, CRM Calculations.


One of the genuinely forecastable figures in economics is demographics. People tend to age simply by continuing to live. While a trite statement, it contains material power for understanding the future economy. For most of the developed world, the malleable ages of 19 to 65 contain their working careers. The implication is that one can understand the economy’s productive potential of an economy by measuring the number of people. More people working tends to bring more or faster production. When combined with productivity (e.g., the amount of output for a given effort), they provide a general measure of consumption growth. Peril resides in these measures for most of the developed world.


Japan aged in a slow-moving economic tragedy over the last few decades. Their workforce has declined every year since 1996. As technology proliferated, the nexus of increased supply and diminished demand drove price levels lower, and their debt higher as fiscal policy tried unsuccessfully to offset the decline. Continental Europe crossed this Rubicon in 2011 while China broke the threshold in 2016. The US is not far behind.


Exhibit 2. Forecast Workforce Growth (2020-2030)

Source: United Nations, Department of Economic and Social Affairs, Population Division (2015). CRM calculations. Asia excludes China & India, Europe excludes UKS (UK & Scandinavia), Americas excludes the US & Canada. The Workforce is prime age between 19-65 years.


Over the next decade, China, Europe, and Japan will experience declines in their prime-age workforce (exhibit 2). The US and Northern Europe will effectively maintain their current levels. Thus, maintaining the current growth rate requires either higher productivity or fiscal spending to offset the slowing demand growth. This situation is where hope resides for the US.

Understanding human behavior through their life cycle is material to perceiving how the economy will perform. This ability is especially so within a country where behaviors and cultural norms are consistent. The power lies from appreciating how consumer behavior changes during different periods of our working lives. Initially, new entrants to the workforce are full of zest but devoid of experience while learning their craft. As they age, the convergence of knowledge and ability enables higher production. Simultaneously, we spend time transferring knowledge and managing other people and processes as we near the latter parts of our career. This management slows output while making wisdom endure through the organization, a beneficial outcome.


Exhibit 3. United States Workforce Segmented by Age Cohort


Source: United Nations, Department of Economic and Social Affairs, Population Division (2015). CRM calculations. The workforce is prime age between 19-65 years. The Learners are ages 20-34, the Producers are ages 35-49, the Managers are ages 50-64.


Through this lens of the career cycle, we can infer how the workforce changes, not only its size. When segmenting workers into three equal cohorts between the ages of 19to 64, definitive waves emerge for the US since the 1940s (exhibit 3). The high proportion of Learners through the 1970s focused on household formation and increasing their productivity. Later, the growing size of the Producers enabled higher productivity through the 1980s and 1990s. The challenge is when these cohorts become unbalanced.

Price pressures arise when the key Producers cohort is low in proportion to the Leaners cohort. This outcome results from the convergence of the Learner's higher demand through their household formation with the relatively smaller Producers cohort inability to increase capacity at a rate consistent with the Leaner's needs. This result is particularly relevant in a service-based economy. The coupling of these two forces resulted in the inflationary period during the 1970s (exhibit 4). If this linkage endures in the US (exhibit 3), then the prospect of declining Learners and growing Producers is disinflationary.

Exhibit 4. US Consumer Inflation (annualized rate, 7-years)

Source: Federal Reserve Economic Database, CRM Calculations. Blue highlights period of growing proportion of Learners (exhibit 3) in the workforce and thus higher inflation from household formation.


Productivity is another progeny of demographics. As the proportion of Producers grows relative to the Learners, productivity increases. The confluence of experience and capability conspire to increase production. While technology is undoubtedly a contributing factor, the most productive people dominate a service-based economy like the US from their ability to get the most out of others. Paraphrasing an adage, it’s not what you know but how you enable people to perform.

This outcome is evident in the productivity numbers. Periods of expanding productivity coincided with periods of an expanding proportion of Producers, highlighted in orange in exhibit 5. The Boomers in the 1970s and the Millennial children of the 2000s share a similar trait. Irrespective of their capabilities upon entering the workforce, they both had to learn how to contribute productively. Herein lies hope for US growth and for further disinflationary pressure.

Exhibit 5. US Output per Hour (annualized rate, 7-years)

Source: Federal Reserve Economic Database, CRM Calculations. Orange highlights period of growing proportion of Producers (exhibit 3) in the workforce and thus higher productivity.

The prospect for productivity growth is self-evident in the data. While an increasing cohort of Producers is beneficial, the difference this time is that they are replacing the Managers, not the Learners. The implication is that the marginal productivity gains will be less than before, while it is uncertain for price levels.

The ratio of dependents (less than 19 and greater than 65) to the workforce will decline. The difference this time is that the retirees, not youth dominate the proportion of dependents. Only the future will determine the extent that retirees need resources more or less than the young and the subsequent impact on demand.

There is one certainty: the US will have to service more debt in the future. For fiscal 2020, the Federal deficit exceeded three trillion (exhibit 6). Unless there is a divided government, further stimulus is in the cards. While 2021 may not approach 2020 levels for the deficit, the levels may very well resemble the one trillion-dollar levels of 2008-09 and may add another $2 trillion to the bill. A three-year total may reach $5 trillion and add at least $50 billion to the debt service.

Exhibit 6. US Federal Deficit

Source: Federal Reserve Economic Database, CRM Calculations.

The target of any fiscal stimulus will determine its efficacy for the economy. Further, tax cuts unquestionably send equity markets higher at the cost of higher interest rates and little growth. Expanding infrastructure, education, and health care are the most probable outcomes. These targets at least have the prospect of long-term efficiency gains that augment growth. The zeitgeist of the time is people over capital. Whether the polemical politicians hear the clarion call is another story.

While the growth expectations remain unchanged with a slow recovery envisioned, the unpredictability of the interval between election and inauguration makes any projection futile. Thus, the presentation includes a brief discussion with alternate facts that accounts for an unstable transition. The current expectation is a continued recovery in the fourth quarter and slower growth through 2021 with a return to peak by the end of that year.

Exhibit 7. Forecast for US GDP Growth

Source: CRM estimates. Amounts are annualized rates.

In the event of an unstable transition and forceful return of the virus, the fourth quarter could see a decline parallel to the first quarter. The expected fourth-quarter growth would disappear and return in the first quarter augmented by further stimulus in that scenario. The greater risk in this scenario is to democracy and an erosion of faith in the government. For that outcome, there is no forecast.

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