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Implications of Slow Population Growth

January 2, 2020 | Posted in: Insights

In August of 2019, we published a paper called Let’s Get Real that pointed out that long term economic growth is equal to the sum of population growth and increases in output per hour worked, otherwise known as productivity growth. Over the past 60 years, the US population has grown at a 1% annual rate while productivity improved 2% per annum resulting in Real GDP growth of 3.1%. The issue is that both have slowed in recent years. Specifically, productivity grew at a 1.3% annual rate over the past five years and population growth slowed to .7% over the same period.
This week, the US Census Bureau announced that population growth for the most recent year was .5%, the slowest in many decades. This slowdown is attributed primarily to declining immigration and postponement of childbearing by Millennials. Unfortunately, productivity grew at a 1.5% annual rate over the past year and it actually declined by .2% in the third quarter. If we assume 1.5% productivity growth (not a slam-dunk given the most recent quarter) and .5% population growth, we are likely to experience economic growth of around 2%, not the three to four percent that is touted by many politicians. Population growth changes very slowly so we can have some confidence that the recent figures will persist. It is possible that advances in technology will finally result in a resurgence of productivity growth, but that good fortune has been expected for some time and has not materialized to date. Economic growth of 2% is certainly not disastrous, but we sense that many investors have lofty expectations so we will be watching the economy carefully as the year unfolds.