Demographics, Not Economic Growth, Key In Ending Accommodative Monetary Policy

After explicitly stating that monetary policy will remain in an accommodative mode until the unemployment rate stabilizes at 6.5%, the Federal Reserve officially made the unemployment rate the most important data point of the month.

The key to rate forecasts is how quickly the unemployment rate will snap back to this target. The Fed assumes that stronger economic growth will be the driver for lower unemployment. Updated demographics data, however, suggest there will likely be a return to a 6.5% unemployment rate by the middle of next year regardless of the performance of the economy.

Demographics therefore, and not strengthening economic conditions, could pose some challenges for the Fed in managing the market's expectations for its interest rate policy.

In a research paper published by the Federal Reserve Bank of Chicago, Aaronson and Brave (2013) estimated how much payrolls would need to increase each month in order to foster a downward-trending unemployment rate.

The common adage is that payrolls need to increase by 120,000 - 150,000 each month just to keep up with normal population growth. As the Baby Boomer generation retires and the working-age population decelerates in the next few years, the amount of jobs needed to keep up with population growth naturally shrinks.

Using the latest population estimates from the Census Bureau, Aaronson and Brave noticed that payrolls need to increase by only 80,000 over the next couple of years to lower the unemployment rate. Even more startling, by 2016 payrolls would need to increase by only 35,000 to foster an unemployment rate decline.

The change in trends is the result of decelerating population growth and a labor force participation rate that drops by roughly 0.3 percentage points per year.

These projections mean that the economy would reach full employment (4.8% - 5.2%) by 2016 if payrolls increase by roughly 195,000 jobs per month. The all-important 6.5% target could be reached by the middle of 2014, depending on the rate at which discouraged workers return to the labor force.

In a Goldman Sachs note, Jan Hatzius took umbrage with the calculations used by Aaronson and Brave and believes that payroll growth needs to average 130,000 - 140,000 to produce a downward-trending unemployment curve. That means a rate hike would occur sometime in 2015 if the economy continues on its current path.

Assuming population growth of 1% per year and a steady labor force participation rate, payrolls would need to increase by 130,000 per month to keep the unemployment rate steady. If the labor force participation recovers, as Goldman expects, then payrolls growth would need to be slightly higher to keep the unemployment rate fixed.

There is no argument from Goldman that population growth is decelerating. The main difference between the estimates is that the Goldman study assumes that the labor force participation rate will return to pre-recession levels. Aging demographics, however, conflict with that assumption.

We created an estimate for an economy-adjusted labor force participation rate by regressing gender, race, and the output gap -- a measure of where the economy is positioned in the business cycle -- against 14 different age cohorts. This would give a labor force participation rate that is based on demographics and is absent of economic effects. These figures were then multiplied by their respective percentage of the total population and summed together.


The labor force participation rate, excluding economic factors, has naturally declined since 2000. The rate of decline has increased exponentially since 2011. By the end of Q1 2013, the actual labor force participation rate was only 0.4 percentage points below where we would expect the rate to be if the output gap was zero, indicating an economy near full employment.


Using the Census population and demographic projections through 2020, the labor force participation rate is expected to fall approximately 0.2 percentage points per year, regardless of economic conditions. That is in-line with the 0.3 percentage point drop per year in the labor force participation rate estimated by Aaronson and Brave.

Assuming the labor force participation rate falls by 0.2 percentage points per year, as our regression results find, only 100,000 jobs per month would be necessary to keep the unemployment rate steady.

If payrolls expand by 175,000 per month, which is what payroll growth has roughly averaged over the last 12 months without a notable improvement in the sub-par economic recovery, then the unemployment rate should drop to 6.5% by the second half of 2014.

This all means that demographics alone increase the likelihood that the accommodative monetary policy ends before typical signs of economic improvement, such as accelerated investment or strengthening consumption spending, are realized.

Link -
http://seekingalpha.com/article/1500522-demographics-not-economic-growth-key-in-...
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Similar reasoning applies in OZ, for the unemployment rate being restrained, SO FAR!

What I can gather about world population is that the fertility rate of the world is decreasing.

Most(not all) countries besides those in Africa have fertility rates below what it enough to sustain a population level (most first world countries I think it's 2.1. 2 to replace the mother and father and .1 to take into account disease and women that don't have  children or enough children or more than 2.1 children).

Apparently it's peaking at 7 billion and will start to trail off on a downward trend.

Vuk11 wrote on Oct 7^th, 2013 at 1:19pm:


Not according to the UN & other "interest groups". According to them, the status quo will continue thru to 2050+ & the Global Population will continue to rise, to 9 Billion+.
ALL OF WHICH IS SIMPLY BULLSHIT!
The Global Population supposedly hit 7 Billion last year.
If that is correct, then I would suggest we will get to somewhere around 7.50-8.0 Billion, BEFORE FINALLY LEVELING OFF & THEN GOING INTO DECLINE FOR THE REST OF THIS CENTURY, possibly leveling off around 2-3 billion!



I re-post here, as it is relevant.
perceptions_now wrote on Oct 7^th, 2013 at 1:23pm:

perceptions_now wrote on Oct 7^th, 2013 at 1:36pm:


Sure I can run with that. Either way due to fertility it isn't some linear rise to infinity.

Quote:


Of course.
Nice post.

Growth Rate            
1.00%
Whatever is being measured, Doubles every 70 years

1.50%
Whatever is being measured, Doubles @ 46 years & hits 300% after 75 years.

2.00%
Whatever is being measured, Doubles every 35 years.

3.5%
Whatever is being measured, Doubles every 20 years.

7.00%
Whatever is being measured, Doubles every 10 years.

And, if what is being measured is Global Population, then that would mean in 2083, only 70 years from now -
@ 1.00% - the Global Population would be 14 Billion
@ 1.50% - the Global Population would be closing in on 21 Billion
@ 2.00% - the Global Population would be 28 Billion
@ 3.50% - the Global Population would be closing in on 78 Billion
@ 7.00% - the Global Population would be closing in on 800 Billion

The standard Global Population Growth rate over the last 80 years or so, has been just over 1.50%.

Clearly, the planet will not support human Growth rates @ 7%, 3.5% or even 2%!

I would also suggest, it has very little chance even at 1.5% and it is even likely to struggle at 1%!

So, something/s must change and the starting points must be Politics & Economics!

And, if that start is not made soon, then we will consign our children, grandchildren & all future generations to an existence not currently conceived or no existence at all.

IT'S TIME!   

PS - We need to be very careful what we ask for, particularly if we don't fully comprehend what that means!

To Be Continued

A Permanent Slump?
http://www.nytimes.com/2013/11/18/opinion/krugman-a-permanent-slump.html?_r=2&

Larry Summers on the Danger of a Japan-Like Generation of Secular Stagnation Here in the North Atlantic
http://equitablegrowth.org/2013/11/16/759/this-mornings-must-watch-larry-summers...
Includes must-watch: Larry Summers on the danger that the U.S. and Europe are turning Japanese, i.e., about to repeat Japan’s ongoing post-1991 episode of secular stagnation.

Treasury official forecasts brake on living standards for next decade
http://www.brisbanetimes.com.au/national/treasury-official-forecasts-brake-on-li...

Ageing Australian population demands radical measures, commission warns
http://www.theguardian.com/world/2013/nov/22/ageing-population-radical-measures-...

Raise pension age to 70 'or greying will cripple economy'
http://www.theaustralian.com.au/national-affairs/raise-pension-age-to-70-or-grey...

Pension age may need to rise: Productivity Commission
http://www.afr.com/p/national/warning_on_nation_prosperity_Mc9dVWnAbP4kBgszdiQ3v...

Push to lift pension age, tap home equity
http://www.heraldsun.com.au/news/breaking-news/push-to-lift-pension-age-tap-home...

bogarde73 wrote on Nov 23^rd, 2013 at 8:51am:


I haven't seen that doco, But it is probably referring to these sort of figures -

World population milestones Population (in billions)      
1      2      3      4      5      6      7      8      9
1804      1927      1960      1974      1987      1999      2012      2027      2046 - Year
-     123      33      14      13      12      13      16      19 - Years elapsed between milestones      

UN Global Population - Future Estimates

http://en.wikipedia.org/wiki/World_population

As can be seen, the Global Population doubled from 2 Billion in 1927, to 4 Billion by 1974 and by 2027 (100 years on from 1927), it is suggested that the Global Population will be 8 Billion.

Whilst we are already at slightly over 7 Billion and we MAY reach 8 Billion on current forward momentum, it is possible that we MAY not reach 8 Billion & I would suggest it is Not likely that we will ever get to 9 Billion, as Climate, Food, Fresh Water & vital Resources, such as Energy are already hitting limitations & are likely to go into Decline, as will the Global Human Population!   

Little Accuracy In Economic Predictions

I have yet to see a model of the economy which can project future dynamics including accurate projections of productivity, employment, inflation, earnings, peak anything, bubbles, social changes, wars, et al.

Economic models use existing trends and extrapolate to forecast. The surprise in the punch bowl is that economic dynamics are not fixed, and dynamics which align to make an economy flourish in one time period can combine with additional "evil" forces sometime in the future to work against the economy. Take the baby boomers for instance.

Economists saw the acceleration of the economic growth of the late 20th century - and projected this growth into the future. The Great Recession of 2007 might be considered the economic reset from a multi-decade period of high economic growth to a "new normal" of relatively bland economic growth.

One of the main contributors to this reset was the baby boomers

(a population distortion caused by the end of World War II). The economic argument is that young people starting out in life consume more as they start a family and then work their way to a peak in their career path.

As people age, they begin to see retirement - and as people near retirement, they start to squirrel away assets and money to have more spending power available in retirement. When one retires, less funds are available - so spending is less.

It follows then that increased economic growth can triggered by a slug of young entering the workforce (aka boomers beginning in the late 1960s). The 21st century boomers are not spending like they did at the beginning of their working lives - and the economy is reverting to mean that existed in the late 50s and early 60s after the economic distortions of rebuilding the world healed after World War II.

What I find interesting is the declining birth rate leading into the Great Depression of 1929.


It might be argued that the great birthrate cascade from the beginning of the 20th century to the middle of the 1930s was interrupted by the baby boom and what we have seen in recent decades is simply a continuation to a new bottom in the birth rate. This new bottom has not seen "rescue" and "recovery" such as provided by the baby boom.

Link -
http://seekingalpha.com/article/1869511-little-accuracy-in-economic-predictions?...
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With all of the resources available to government & TPTB, let no one tell you, that the effects of Demographics on the National & Global Economy has just now been realized!

Let no one tell you, that "suddenly" the massive effects on government expenditure has just come to light & only now, has it been realized that these Expenditures are not affordable!

Let no one tell you these things, because they have all been apparent or should have been, for decades, to anyone taking a serious look at where likely trends would take us.

So, the real truth is that, THE TRUTH OF DEMOGRAPHICS, OF ENERGY SUPPLY PROBLEMS, OF CLIMATE RELATED ISSUES & OF THE IMPACT THAT THESE & INSUFFICIENT INCOME STREAMS WOULD HAVE ON DEBT HAS BEEN KNOWN FOR 40 FORTY YEARS OR MORE, BUT THOSE IN GOVERNMENTS (OF ALL SORTS) AND OF TPTB HAVE SIMPLY IGNORED KNOWN FACTS, BECAUSE IT DIDN'T SUIT THEIR SHORT TERM INTERESTS!

Well, they can't have their own way, all the time!!!