It could be argued that fiscal and monetary stimuli have created the recent economic improvement and that the fundamentals of the economy are not sufficiently strong to maintain the momentum once the stimulus runs its course in the coming months. What does not go away under the best of circumstances is the huge weight and drag of an unprecedented run-up of debt incurred by decades indulgence and more recently and recklessly in the name of stimulus. It is also a fact that there is neither political appetite nor practical ability to add further stimulus.
The engine of our economy is largely (70%) consumption based, that engine is aging, quite literally beyond its ability to snap back as quickly as in previous recessions. During my thirty years in this business I have ignored the influence of the Baby Boom generation as the major driver of the American economy at my peril. The 76 million babies born between 1946 and 1964 have been the big spenders in the American economy for years, shaping America in dramatic and significant ways. As a group they have been studied and specifically marketed to every day since the first ones were launched by Dr. Spock. Their cultural and economic impact has been remarkable every step of the way. It may well be that they, having passed their spending peak years will become more of a drag on the economy than ever before.
Economists such as Harry Dent and Dan Arnold say that demographics offer the best leading macro-economic indicators. They argue that the spending habits of people are very predictable and that significant demographic shifts can exert highly predictable influencers on an economy. The term ‘spending wave’ refers to the economic effect of departing children from the home. When a society experiences a high level of such family change an economic decline follows from reduced spending overall.
According to Dent in his book The Next Great Bubble Boom: How to Profit from the Greatest Boom in History, the stock-market decline of 2008 was a result of baby boomers aging past their peak spending years. This prediction was based on the observation that consumer spending peaks near age 50. As noted in Wikipedia, in 2002 Dan Arnold echoed this theory in his book The Great Bust Ahead, with the big spenders being 45-54 year olds, and their numbers peaking in 2011-2012.
But in addition to the demographic factors holding back the recovery, there are other inescapable truths. Consumers, which represent 70% of our economy do not spend as much when they are not confident of their future. Two things closest to their hearts are their jobs and their homes. Today’s jobs report was a breath of fresh air, but an unemployment rate more than twice historical levels still weighs heavily on confidence. Home values continue to decline and the inability to sell and move makes it difficult or impossible for job-relocation. Add the daily domestic political rancor at home and abroad, the continuing threat of European recession, and the growing possibility of a Chinese bust and one can find it hard to be optimistic about the coming year.
If any of this sounds like prediction, please don’t take it as such. The future is just as uncertain and unpredictable as it ever was and getting it right is merely luck. But as the farmer tests the soil before planting, wise business investors and managers weigh the full range of risks against the possible scale or returns.
Those investing to meet life’s goals do well to ignore the gyrations of economies and stock markets. Stocks are driven by earnings and those earnings on average grow faster than inflation. If the expected returns of the capital markets are sufficient to confidently meet one’s savings needs, why would he increase uncertainty by trying to time or to better those returns?
