Thursday, June 1, 2017

Realism is the new Pessimism (or Why 4% GDP Targets are Ludicrous)

The American core population (aged 15-64) is the greatest economic consumptive force on earth.  They make up 2/3rds of the total US population and 95% of US employment.  When considering growth, particularly the all important annual growth in Gross Domestic Product, the growth of this population should be the first consideration (although it is strangely nowhere in typical economists or Federal Reserve accounting).  From a growth perspective, it doesn't matter if this population is 3.25 million or 325 million...all that matters is how many more there are than the year before.  Some will point to wage growth but this is essentially equally offset by rising prices.  It is the growth in this population that drives the need for new housing, new infrastructure, and generally adds millions of new consumers every year (aka, demand growth).  Their impact on GDP is easily 10x's to perhaps 20x's greater than their small growth percentage increase would indicate (yup, simple population growth drives 50%+ of GDP growth)...until now.

The core US population growth has been slowing since '00 and as of this year (drum roll please) that growth is ending.  To be clear, this wasn't "supposed" to happen.  Not according to the Census or all those planning on perpetual growth.  But as the chart below highlights (yoy change on a monthly basis), for the first time since WWII (and perhaps in US history) the core US population has ceased growing...and is likely to begin declining in the coming months and years.  FYI - The spikes of '90, '00, '10, and more since are due to Census adjustments, not sudden population changes.  Further downgrades should be expected as Census estimates for growth remain overly optimistic.

A combination of factors are driving this cessation of core growth including decades of negative birth rates (even among the recent immigrants), the graduation of the boomers to the 65+ population, and little to no net illegal immigration since '08 (now combined with political and enforcement factors further turning net immigration to significant levels of net emigration).  This all adds up to a fast decelerating basis for US consumption growth...and out the window with it, the notion that superior immigration driven US demographics will save America.

Yes, the total US population is still expected to grow this year by 2.2 million, at a total level more in-line with that seen in the 1980's (when the US population was 2/3rds it's current size).  However, even that 2.2 million number is likely to be significantly downgraded due to the factors above...perhaps downgraded by as much as 50%...such is the impact of net negative illegal immigration?!?
Some real world correlations may be found in plotting housing starts vs. the annual change in core population...below.  The current divergence of rising housing starts for a core population no longer growing should be setting off alarm bells.And vehicle sales vs. change in core population...below.  Selling massive quantities of debt fueled vehicles for a core population no longer growing...what could go wrong?
If this trend persists, all net US population growth is now solely among the 65+yr/old population living a decade+ longer than the previous generation.  From a GDP growth perspective, the impact of a declining 0-64yr/old population (the big population that drives economic activity) only offset by a much smaller but growing 65+yr/old population (that is leaving the work force, credit averse, and moving to fixed incomes) should be pretty straight forward.  Simply put, the basis for GDP growth (among other things) is in deep shit!

The chart below detailing US population growth among the demographic segments versus annual GDP.  The last column on the right is a death knell for growth in a world already awash in overcapacity and debt.

And as for GDP, it is now simply a reflection of new federal debt.  The chart below shows annual GDP growth minus the annual growth in federal debt...and since '08, there is no growth but the growth in un-repayable federal spending...and it's going to get much worse.  Full details HERE.
And for those who struggle to understand the impact of the core population, the chart below highlights the substitution of federal debt since the core growth began decelerating.  And what level of federal debt creation (and CB asset purchasing) will need happen as the core ceases growing or outright declining?  Well, I guess we're all about to find out how you make fewer people consume more stuff (or at least how you make the numbers appear so) and simultaneously avoid asset bubbles from imploding.

Of course, none of this is reflected in the "markets" as the chart below highlights.  The Wilshire 5000 (blue line representing all publicly traded US equities) has blasted $10 trillion higher than the acknowledged "bubbles" of '01 and '08.  Talk of further interest rate hikes, the Fed reducing its balance sheet, and true economic growth is simply a most vexing discussion in the face of a likely declining consumer base!?!  I attempt to pull together the growth of flood of M3 "money" HERE and decelerating population vs. consumption HERE.  Lastly, I try to outline who is buying the Treasury bonds HERE and likewise how the stock market is levitating HERE.
And as always, there will be those who suggest it will be global growth that is lifting all boats...again, bullshit...as outlined and detailed HERE, HERE, HERE, and especially HERE and HERE. The current system of infinite growth on a finite planet is up against some very hard stops...and how much longer the papering over of widening chasms can be maintained is unknowable (as is which assets may survive the great fall and the subsequent reset).  The only thing I know for sure is the fall is imminent, the heights from which we will begin our descent are dizzying, but it's unsure what will arrest our fall into depopulation, deflation, and depression.  Realism is the new pessimism.