Sunday, September 17, 2023

Considering California

Demographics is usually kind of like watching grass grow...but when something somewhat shocking is taking place, and nobody seems to be talking about it...well it deserves a spotlight.

I think it's fair to say, so goes California, so goes the US...

So here goes a quick article on California annual births versus California home prices...let's dig in.

1- After rising for a century+, births in California peaked in 1992 and have been falling precipitously since. Annual births have now declined by nearly 200 thousand or -32% amid the largest childbearing population in US history. The decline in births (inclusive of ALL births, regardless parents' legal status) has been going on for so long that now the under 30-year-old population has begun the follow through of that birth decline. A like 30% (and growing) decline is to be expected eventually for the entire population of the state, working its way from youngest to eldest population segments.

Soaring housing prices amid declining annual births would seem logical as young adults are most likely to be negatively impacted by the rising costs of living...and choosing to forego marriage, children as a result.

Unsurprisingly, California's annual population growth accelerated, then peaked in 1989, and was decelerating until 2019...then outright declining since. Many assume it's the state's politics, or tax policies, homeless, or unaffordability driving a temporary decline...but in truth, California's decline is coming from bottom-up negative demographics...only worsened by the sudden exodus.

A perusal of California's population by age groups (0-30yr/olds, 30-60yr/olds, 60yr/olds vs total housing units) highlights that the youngest segment began its demographic driven secular decline in 2015 (following the declining birth trends) and the 30 to 60yr/old segment began its decline in 2020. The 30 to 60 year-old cohort began falling earlier than it was going to demographically...primarily due to a slew of political, business, tax, and lifestyle issues in California. However, housing unit creation continues unabated.

Below, California's year over year changes in population, by 20-year age groups, set against annual growth in housing units. The demographic deterioration is easy to see. All segments are now in decline except the ongoing growth of elderly...demographically, these trends are likely to not only continue but accelerate.

Putting California's declining population into perspective against its rising housing units...take note of the red line, detailing housing units per capita in California at a new all-time high, surpassing the previous peak set in 2007. This is just to suggest that there isn't a housing shortage, rather a housing affordability crisis which isn't borne of inadequate housing...but inappropriate Federal Reserve set interest rates and asset purchasing, federal government debt creation, and state/local tax/regulations (ie, Proposition 13 (1978) limiting the property tax rate to one percent of the property’s assessed value plus the rate necessary to fund local voter-approved debt. It also limits increases on assessed values to two percent per year on properties with no change of ownership or no new construction).

I suggest a crisis is imminent in California as a shrinking working age population is at record high total number of employees (and likewise record employment %)...suggesting there is little to no further fuel for employment growth available. The demand pushing that record employment was short-term interest rate driven deficit spending, stimulus, PPP (much of it straight fraud), etc. etc. As the Federal Reserve is "normalizing", demand and resultant employment will likely fall precipitously.

Below is annual California population change (divided between under 65yr/olds vs 65+yr/olds), annual change in net housing units, and resultant change in home prices. Given the declining under 65 year-old population makes up essentially 100% of the 1st time home buyers, 90%+ of the states employees...the imbalance of inverting demographics, record high home prices, record housing units per capita, at record high short-term debt fueled employment rates, amid significant ongoing housing unit creation could/should give one pause?!?

The idea is to keep this article I will not detail the interest rate and asset purchase manipulations that resulted in a housing price surge amid decelerating/declining quantities of potential housing occupants. But just understand as long-term organic demand moved lower (left to right), short-term synthetic demand moved upward (left to right). If those short-term manipulations are not maintained &/or increased...a likely housing price decline or collapse would be the most likely end-result.

*Demographic and housing unit data thanks to US Census, Home price index thanks to US FHFA.

PS - how this started, where it's going...

Extra credit charts...since I made 'em, think they're interesting, might as well post 'em.

Monday, September 17, 2018

The Imminent Hard Stop

There is an imminent hard stop to jobs growth in the US and a like resultant problem to growth in consumption and economic activity.  The hard stop is simply the outcome of fast growth in employment versus fast decelerating population growth among the potential labor force...resulting in a labor participation rate that will peak as soon as 2019 or as late as early 2020.  And like night follows day, recession will ensue as soon as employment growth abates.

The US labor force participation rate amid 25- to 64-year-olds, at midyear 2018, was 75.2%.  In the post 1980 period (since women have entered the workforce en masse), peak labor force participation rates have been somewhere between 76% to 78% (highlighted in the chart below).  At that point, essentially all those capable and/or willing to work are employed.  The remaining quarter of the 25- to 64-year-old population are busy with parenting, caregiving, extended schooling, early retirement, incarcerated, on disability, face skills mismatches, or suffer physical or mental challenges that make work unlikely or impossible.  Simply said, if jobs continue growing anywhere near the current pace, by the end of 2019, the labor force will simply not be capable of providing further growth.
If the US population is still growing, why isn't the potential labor force able to provide the labor for a growing economy?  The chart below shows the annual growth of the 15+ year old US population, from 1951 to 2028, through the next decade.  The black boxes with yellow numerals show the total 15+ year old population growth double peaking at +2.9 million persons annually in 1975 and 1998, decelerating to +2.7 million in 2008, and now down to +2.1 million in 2018.  But the bigger story is the demographic that makes up all the growth, shifting from the blue columns representing growth among the 15- to 64-year-old population to the 65+ year old population.

As the head of household ages, their average annual income / expenditures and labor force participation rates rise, peak in mid-life, and fall away as they age (chart below).  So, if the vast majority of population growth is among the elderly population with income / spending at just half of peak years...and collapsing labor force participation rates, then the growth in the potential labor force is severely impacted.
The chart below shows the annual growth in the potential labor force multiplied by participation rates among the different age segments.  The impact of the population growth shifting from the prime working age population to the elderly has impaired the potential labor force severely and this will only become more acute moving forward.  Peak annual potential labor force growth took place in 1998, adding 1.9 million persons...almost entirely among the prime working age population.  By 2008, total potential labor force growth was down about 15% (from peak) but the shift was well underway with the prime working age population growth down 25% to 1.4 million annually.  By 2018, the potential labor force growth is just 35% of peak.  By 2028, annual labor force growth will be just 15% of that seen at peak growth.
So how does this translate to jobs growth?  The chart below shows annual changes in non-farm payrolls versus the annual change in potential labor force.  Each period of jobs growth, well in excess of the labor force growth, is circled.  The years of peak 25- to 64-year-old labor participation rates are highlighted in yellow as these were the years the labor market ran out of potential available laborers...and recession was imminent.
By year end 2018 or latest mid 2019, if employment continues trend growth, the labor force will essentially run out of employable persons.  Said otherwise, the economy will run out of new consumers and this situation of minimal labor force growth will only become more severe over the next decade (and yes, this is factoring in present rates of immigration...if those rates continue slowing, the situation only becomes more acute).

Of course, regardless the steep trouble facing the US...the US is still better demographically and population growth wise than many or even most of the developed and developing nations of the world (detailed HERE).  The US has ample resources to feed and fuel ourselves, care for one another, maintain and promote peace (for a change).  Unfortunately, the nation (and much of the world at large) have decided to believe in financial fairytales and false indicators that require no difficult choices or changes.  However, we still have options about how we will approach what is likely to be the hardest epoch in this nation's history...but the longer we wait, the more difficult and painful the remaining options become.

2024 Updates-