From ZIRP to NIRP Part III: How Low Interest Rates Devastate Retirees

Whereas central banks’ experiments with historically low interest rates have had mixed results on economic growth at best, they have also had devastating effects on American retirees’ nest eggs. As discussed in earlier segments of this series, rock-bottom (or even lower) interest rates and aggressive quantitative easing have done little to spur robust and sustainable economic growth in Japan and the US. Instead, they encourage risky investments and hurt savers and conservative investors.

Another negative outcome of such policies is that retirees on fixed incomes who are reliant on savings and interest are hurt by an extended period of miniscule returns. This is not an insignificant portion of the population. There are now more than 45 million Americans age 65 and older, representing over 13% of the population– a higher portion than at any prior point in US history. While nearly 20% of this group is currently employed due to the effect of the recession on their meager retirement savings, by some counts, an average of 10,000 boomers retire each day.

Once they transition into retirement, and shift from saving to spending, retirees normally seek to de-risk their portfolio. They typically turn to fixed-income products and move their retirement money into assets like certificates of deposit (CDs), low risk treasury bonds, and annuities. Unfortunately for this group, interest rates are extremely low. Whereas ten years ago, retirees could have relied on a yield on 10-year Treasury bonds that exceeded 5%, they are lucky to get 2% today. Rates on CDs, money market accounts, and savings also remain low. While some are sticking with their meager 1-2% returns, others have been encouraged to turn to higher risk investments in the stock market and real estate, pushing them to lofty valuations.

A 2015 report from Fidelity found that 35% of those between ages 51 and 69 are overexposed to the stock market. Moreover, 10% of this group have their entire 401(k) assets invested in stocks, meaning any sort of stock market volatility to could devastate them. Conversely, economists warn that if this generation begins to transition and de-risk their portfolios, the stock market could experience a sharp drop.

References:

http://money.usnews.com/money/retirement/articles/2012/01/09/65-and-older-population-soars

https://www.bloomberg.com/news/articles/2016-05-13/-i-ll-never-retire-americans-break-record-for-working-past-65

http://money.cnn.com/2015/08/14/retirement/retirement-baby-boomers-stocks/

http://finance.zacks.com/impact-baby-boomers-retirement-stock-market-5643.html

America’s Birthrate Declines in 2015

Recent data culled by the Centers for Disease Control and Prevention showed an unexpected drop in births in the US in 2015, which fell by 1% from 2014, contrary to the forecasts of demographic analysts. Moreover, the US fertility rate in the first quarter of 2016 fell to 59.8 births per 1,000 women aged 15-44, tying 2013 figures for the lowest fertility rate on record. The figure translates to less than six births for every 100 women, prompting talk that America is currently mired in a baby bust.

America’s current general birth rate is 13.42 births per 1,000 citizens, according to the CIA World Factbook, a figure which is down 10% from 2007.  For comparison, Mexico’s birth rate is 42% higher, or 19.02 births for every 1,000 citizens.

Closer examination of the figures reveals a dramatic change in the ages that women have children today and provide insight into the declining birthrate. There has been a precipitous drop in teenage pregnancies and pregnancies among women in their 20s, both of which have played a large role in driving down the US birthrate. To put it differently, millennials, who have not been having children, are largely responsible for the declining numbers.

A 2015 study by the Urban Institute found that the birth rate for women ages 20-29 fell by 15% between 2007 and 2012. “If these low birth rates to women in their twenties continue, the U.S. might eventually face the type of generational imbalance that currently characterizes Japan and some European countries, but it is too early to predict or worry about that eventuality,” the report noted.

Social changes have pushed women to bear fewer children and put off pregnancy until later in life. Moreover, the economic pressures exerted by the 2008 recession have likely played the biggest role in disincentivizing childbearing among millennial women. While abortion may seem like a likely culprit for this demographic shift, abortion rates have actually declined since the 1980s, according to The Wall Street Journal.

It will soon become apparent whether millennial women will eventually have more children. The most common age in the US is currently 24 or 25, according to The Wall Street Journal, which means there is a sizeable portion of millennials who may decide to become parents in a few short years.

References:

http://blogs.wsj.com/economics/2016/06/07/behind-the-ongoing-u-s-baby-bust-in-5-charts/

http://www.cnbc.com/2015/04/27/baby-bust-millenials-birth-rate-drop-may-signal-historic-shift.html

http://www.cdc.gov/nchs/data/nvsr/nvsr65/nvsr65_03.pdf

http://www.urban.org/research/publication/millennial-childbearing-and-recession

Rate of New Business Formation in the U.S. Plummets

A new report by Michelle Meyer, an economist for Bank of America Merrill Lynch, argues that the rate of new business formation in the United States has plummeted precipitously, directly undermining the notion that the country is in the midst of a “startup boom” and boding ill for future economic growth prospects.

Meyer’s research, which is discussed in a Business Insider report, notes that both the formation of firms (e.g. McDonald’s Inc.) and individual establishments (e.g. the McDonald’s franchise down the block) have dipped since the 2008 financial recession and stubbornly remain low. This is troubling because new businesses tend to hire more people more quickly and enjoy higher productivity rates, compared to established ones. According to her data, the rate at which firms and establishments enter the market currently hovers between 8% and 9%, which is well below the 10%+ pre-recession levels.

Meyer cites a Federal Reserve Board research paper which found that “a one-standard deviation shock to the number of start-ups led to an increase of real GDP culminating to 1-1.5% and lasting 10 years or longer. This suggests a notable and lasting impact on the economy from weak rate of business entry over the past decade.”

She suggests four reasons for the relatively moribund state of business creation in the US. Tighter credit conditions have made it more difficult to start up new businesses by choking off the necessary supply of liquidity and loans. Second, the politically and economically uncertain climate have exerted a chilling effect, discouraging small business formation. This view is affirmed by research from Harvard Business School, which found that “political dysfunction” is hindering U.S. business competitiveness.

Third, contrary to popular belief, the technological disruptions of the late aughts and the shift away from manufacturing have made it even more difficult to start a small business, as businesses migrate away from brick-and-mortar establishments and into the cloud. Finally, Meyer cites demography as another contributing factor, blaming an aging population for dwindling entrepreneurship.

References:

http://www.hbs.edu/competitiveness/Documents/problems-unsolved-and-a-nation-divided.pdf

https://www.census.gov/ces/pdf/BDS_StatBrief4_Exit_Survival.pdf

https://www.thestreet.com/story/13741768/1/stalled-in-america-small-businesses-hurting-the-most-harvard-s-porter-says.html

http://www.businessinsider.com/new-business-in-us-collapsing-disastrous-news-for-economy-2016-9

China’s Rapidly Aging Population Bodes Ill For Future Economic Growth

China’s rapidly aging population has been exerting pressure on the second-largest economy in the world, prompting the U.S. Federal Reserve to warn that China’s growth could decline sharply by 2030. As its population ages, China’s labor productivity has fallen driving a slowdown in economic growth. Furthermore, the growth rate of China’s working age population is worryingly forecasted to become negative by 2020. Instead, China is slated to become the world’s most aged population by 2030. By 2050, over 30% of its population will be comprised of senior citizens, aged 60 or older.

With the overwhelming majority of China’s current working age population already employed (~80%), economists believe that productivity growth, rather than employment growth holds the key to sustaining Chinese economic activity and health in the future. In response to these looming concerns about long-term economic growth, Chinese officials opted to overturn its longstanding one-child policy last year in order to alleviate China’s demographic woes.

“It’s a little too late, but it’s better now than later,” said Yanzhong Huang, senior fellow for global health at Council on Foreign Relations to the International Business Times. “If the policy is put in place immediately, it will only take effect 20 years from now, in terms of relieving the high-level of aging.”

Other possible measures to bolster aging labor forces are proposed in a 2010 working paper composed by Harvard’s Program on the Global Demography of Aging. Suggestions include raising the retirement age, encouraging higher savings, employing primary care providers for children, increasing employment of women, liberalizing immigration, and expanding education.

The Harvard researchers posit that the China’s best avenue for mitigating the effects of an aging labor force is to mobilize and leverage underutilized segments of its population, namely, the undereducated, underemployed, and women. The study’s authors argue that creating a large reserve labor force can “can lay to rest concerns that China will not have enough workers in the future to preserve the country’s impressive growth in GDP and in GDP per capita.”

References:

http://www.reuters.com/article/us-usa-fed-china-idUSBRE92P14T20130326

https://www.hsph.harvard.edu/program-on-the-global-demography-of-aging/WorkingPapers/2010/PGDA_WP_53.pdf

http://www.ibtimes.com/chinas-one-child-policy-change-will-take-decades-relieve-economic-pressures-aging-2161789

http://en.people.cn/90001/90776/90882/7137446.html

U.S. is the Developed World’s Growth Market

7.14.2016 | U.S. is the Developed World’s Growth Market – Rusty Tweed Team

Expected U.S. Growth vs. Other World Powers

The U.S. is expected to add more people than all other developed economies across the next 35 years, seeing a growth of 50 million people by 2050. According to a 2014 Pew Research Center Report, the U.S. will likely increase its population more quickly than European and East Asian countries, but more slowly than Nigeria, which is expected to replace the U.S. as the third most populous country in the world. India is expected to surpass China’s growth and top the list by 2050, seeing its population grow to 400 million by 2050 – almost equal to the combined populations of the U.S. and China.

What will the U.S. look like by Mid-century?

U.S. is the Developed World's Growth Market - Rusty Tweed Team

In June’s edition of the AEW Real Estate Market Outlook, the data suggests that over half of the growth in the U.S. over the next 35 years will be derived from immigration. By mid-century, the U.S. will have no majority ethnicity. The first millennials will hit mid-life within the next ten years; meanwhile, the first boomers will reach 80 within the next decade. Pew Research Center predicts that most countries worldwide, including North America, will see the share of its population that is over 65 overtake the share that is younger than 15 by mid-century.

What will the Impact Be on Real Estate?

In its June U.S. Real Estate Market Outlook report, AEW estimated that the U.S. will be in need of over 30 million new housing units by 2050. 1-2 billion square feet of new office space and a similar proportion of new distribution space will also be required by mid-century.

AEW’s Present Day Economic Outlook

The economic outlook for real estate and construction is looking healthy. The U.S. is now heading into its seventh year of continuous growth. New jobs are still being created at around 200,000 per month. Labor shortages in certain industries are likely across the next several years. Construction is set to accelerate.

The AEW also reported that rents have reached a new peak in most markets across the country. The tightening circle has already started, but it looks to be the slowest in Fed history to date. So far, long rates and property yields have been held down by robust capital flows. It looks likely that there will be outsized property gains in 2015, but moderation will follow.

References for U.S. is the Developed World’s Growth Market – Rusty Tweed Team:

AEW Real Estate Market Outlook, June 2016

http://www.pewresearch.org/fact-tank/2014/02/03/10-projections-for-the-global-population-in-2050/