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Shrinking Labor Force May Curb U.S. Expansion for Two Decades

An employee inspects a power washer at a Home Depot store in Sandy Springs, Georgia. Photographer: Chris Rank/Bloomberg
An employee inspects a power washer at a Home Depot store in Sandy Springs, Georgia. Photographer: Chris Rank/Bloomberg

Aug. 31 (Bloomberg) -- This is not your mother’s recovery.

Women and baby boomers entering the American workforce helped to supercharge expansions in 1975 and 1983 by filling an increasing number of jobs and purchasing more goods and services. Now as the share of women with jobs falls and older Americans age into retirement, the shrinking -- or, at best, slowly growing -- workforce will weaken economic activity for the next two decades.

The demographic changes may be the biggest and least-appreciated reason why the two-year recovery has slowed, because the rate of growth for labor and capital is “the most important determinant” of economic expansion, said James Paulsen, chief investment strategist for Wells Capital Management in Minneapolis.

More retirees mean slower household formation, reduced consumer spending and downward pressure on equity prices as retirement cuts people’s purchasing power, according to John Lonski, chief economist at Moody’s Capital Markets Group in New York, and Gus Faucher, director of macroeconomics at Moody’s Analytics Inc. in West Chester, Pennsylvania.

Household purchases rose at an average annual pace of 3.2 percent in the quarter century that began in 1972, when the oldest of the boomers turned 26, and averaged 2.8 percent since 1996, when they turned 50, according to Lonski. He forecasts the decline will continue, to between 2 percent and 2.5 percent a year, as growth slows for Americans aged 15 to 49.

“A weaker labor force does dampen the pace of the rebound,” along with “our expectation for what an expansionary trend is,” said Dean Maki, chief U.S. economist at Barclays Capital Inc. in New York. “We should be lowering our sights on potential GDP compared to when our population was younger.”

Growth ‘Speed Limit’

Anemic gains in the number of new workers has effectively cut the long-term “speed limit for growth” to 2.25 percent, estimates Maki, a former senior economist at the Federal Reserve. That compares with the Fed’s estimated 2.5 percent to 2.8 percent rate for gross domestic product and average growth of 3.2 percent from 1980 to 2000.

Automakers General Motors Co., Ford Motor Co. and Toyota Motor Corp., motorcycle maker Harley-Davidson Inc. and natural-foods grocer Whole Foods Market Inc. may be hurt by the shift because most retirees will cut spending on big-ticket items and nonessentials, said C. Britt Beemer, chairman of America’s Research Group in Charleston, S.C., a consulting company that studies consumer behavior.

“Older people tend to have lower incomes, their consumption tends to be lower and in that sense, consumer-spending growth would be weaker as well,” said Moody’s Faucher. “There will be fewer people in prime car-buying years,” and “recreational goods and services are a young-adult thing.”

Sell Shares

The aging population also may hold down stock values for the next two decades as boomers sell shares to finance retirement, according to a Federal Reserve Bank of San Francisco research paper released Aug. 22.

“The mentality has shifted to preserving wealth rather than growing wealth, with less-risky portfolio allocations,” said Emily Sanders, president of Sanders Financial Management Inc. in Norcross, Georgia, whose largest group of clients is aged 55-65. A typical 65-year-old may have 50 percent of his portfolio in stocks, which would drop to 30 percent at age 80, she said.

Faucher forecasts changing demographics will lead to a period when nominal GDP growth -- which includes the impact of inflation -- slows to 3.3 percent compared with 5.5 percent before the 18-month recession. That means the rise in corporate profits and equity prices would slow to about 3.3 percent from 5.5 percent as well, he said.

Aging Population

An estimated 72 million people, or 19.3 percent of the population, will be 65 and older by 2030, compared with 40 million, or 13 percent, in 2010, the Census Bureau estimates.

While new college graduates will assume some jobs as retirees leave the workforce, young adults’ share of the population is shrinking. By 2030, there will be 34 million people aged 18 to 24, representing 9.1 percent of the population, down from 9.9 percent in 2010, according to the Census Bureau. The share of people aged 25 to 44 will drop to 25.5 percent from 26.8 percent.

“We are at the threshold of retirement mountain: a huge, huge change in the numbers of people who are reaching the age where they are leaving the labor force,” said Neal Soss, chief economist with Credit Suisse Holdings USA in New York.

While losses from declines in the value of 401k and similar accounts may force some to delay retirement, these delays will be temporary, he said.

Work Longer

“Maybe one of the solutions here is that they work a year or two longer,” he said. “Do we really think we are going to have a lot of 80-year-olds in the workforce? It sounds good until you start thinking about the practicalities of it.”

The baby boom, the population bulge born after World War II between 1946 and 1964, added 9.4 million people in the 16-24 age group during the 1960s and 7.3 million in the 1970s. The percentage of women in the workforce almost doubled to 60.3 percent in 2000 from 33.6 percent in 1953, according to the Labor Department.

Boomers started turning 65 this year, and every day for the next 18 years, about 10,000 more will hit the age that historically has been associated with retirement, according to the Pew Research Center in Washington. Women’s participation in the labor force may decline slightly during the next 40 years to about 57 percent because fewer will have jobs as they grow older, the Bureau of Labor Statistics projects.

Contracting Labor Force

All this means the workforce will expand 0.6 percent annually for the next 40 years, down sharply from 2 percent between 1950 and 1985, according to the bureau. The labor force has contracted 1.1 percent since 2008, mainly because the recession has forced people out of jobs and made it difficult for them to find new employment.

Future recoveries will likely resemble the current one and expansions after the recessions of 1990-1991 and 2001, when labor-force growth already had slowed to near 1 percent, with relatively modest jobs gains, Paulsen said. Increases in resources -- capital, land or labor -- “have been associated with every economic boom” in the U.S. and help explain why emerging markets sustain faster expansions, he added.

While U.S. GDP has grown at an average annual pace of 2.4 percent in the eight quarters since the December 2007 recession ended, that compares with an average of 6.3 percent after the July 1981 slump and 4.7 percent following the November 1973 contraction, both of which lasted 16 months.

‘Vastly Greater’

Gary Burtless, senior fellow at the Brookings Institution in Washington, agrees that slower population growth affects the rate of economic output. Still, the recent decline in the workforce “is vastly greater than can be explained” by demographics and mainly reflects the inability of unemployed people to find work, he said.

Payrolls climbed by 75,000 workers in August after a 117,000 increase in July, and the unemployment rate held at 9.1 percent, according to the median forecast of economists surveyed by Bloomberg News before Labor Department data Sept. 2. In July, the number of long-term unemployed -- people without work for 27 weeks and more -- was 6.2 million and accounted for 44.4 percent of the jobless.

Some industries may benefit from the demographic shift, Faucher said.

“We’d expect to see strong growth in health-care spending, and I think we’ll need to see strong growth in investment spending as companies will need to invest in technology to get greater productivity,” he said.

Walgreen, CVS Caremark

Walgreen Co., the largest U.S. drugstore chain, and CVS Caremark Corp., the largest provider of prescription drugs, both say the aging population could boost sales.

“People reaching 65 have an average life expectancy of an additional 18.6 years and use three times as many prescriptions as the younger population,” Larry J. Merlo, president and chief executive officer of CVS in Woonsocket, Rhode Island, said at a conference earlier this year.

About 70 percent of Americans aged 50 to 64 are very or moderately worried about having enough money in retirement, an April Gallup poll showed. People need about 70 percent to 80 percent of their pre-retirement income to live comfortably after they quit working, according to the Social Security Administration.

Their concerns may be exacerbated as the slow recovery and aging workforce has prompted the government to forecast that Medicare, the U.S. health-insurance program for the elderly and disabled, and the Social Security trust for the disabled and retirees will run out of money sooner than earlier projections.

Insufficient Funds

The trustees of the two programs reported in May that Medicare won’t have sufficient funds to pay full benefits starting in 2024, five years earlier than last year’s estimate, and Social Security’s cash to pay full benefits runs short in 2036, a year sooner than the 2010 projection.

Maya Hahn, an Atlanta real-estate agent, turned 65 last week and said she plans to retire next year on less than half the “six-figure income” she earned during the early 2000s. She considers herself “semiretired” now because of the housing bust in the past few years.

“The happiest day of my life was the day I got my Medicare,” she said. “It was a huge weight lifted off me” because of rising health-care and drug expenses in retirement.

“You have to think about what you spend on anything,” she said. “You don’t go out to movies. You don’t go out to dinner. You don’t go on vacation. There are no fun bucks.”

To contact the reporters on this story: Steve Matthews in Atlanta at; Joshua Zumbrun in Washington at

To contact the editor responsible for this story: Chris Wellisz at

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