The US Economy -- Bullishness Based on Babies

Judie Brown
By Marcus Roberts
June 16, 2011
Reproduced with Permission

It seems a bit counter-intuitive to discuss reasons to be optimistic about the US economy. Every day we hear reasons to fear the worst - high unemployment figures, two costly wars and, of course, that mind-boggling amount of debt.

Yet, despite all those issues, someone who is much more knowledgeable about the economy than I will ever be is indeed confident about the US economy's future. That someone is BlackRock Chief Equity Strategist Bob Doll, whose job is to allocate over $30 billion among shares of large US corporations and advise clients on equity investment at the world's largest money managing company. So what does he see that is positive in the US economy that largely escapes the world's headlines?"

Credit markets are sound. Money growth is good," says Mr. Doll, whose optimism has been the right market call since March 9, 2009, when stocks hit their post-crisis lows. The Dow has since risen more than 85%, and Mr. Doll expects the slow economic expansion to continue. ... "You could say we're the best house in a bad neighborhood," says the man who has spent 28 years managing money. "We have fewer problems and more solutions than Europe or Japan."

And what are those solutions? Well one of them is demography."

Over the next 20 years, the U.S. work force is going to grow by 11%, Europe's going to fall by five, and Japan's going to fall by 17. This alone tells me the U.S. has a huge advantage over Europe and a bigger one over Japan for growth," he says. "And the reason for this is pretty simple. We have higher immigration than both of these, and we make more babies. We have a higher fertility rate. And they are the long-term determinants of population growth and therefore work force growth."

(To underline his point, Japan's population shrunk in 2010 by 125,700, the largest amount since records began in 1899. For the past four years there have been more deaths than births in Japan, but in 2010 the difference surpassed 100,000 for the first time.)

According to Doll, despite all the doom and gloom, despite a dotcom bubble bursting, despite 9/11, despite a property bust, despite a global recession, the US share of global GDP has remained constant at 25 percent between 1995 and 2010. The rise of the developing world's share of global output has come mainly at the expense of Japan and Europe, those countries with bleak demographic trends.

Although of course there are major economic issues that confront the US, at least its demographic outlook is stronger than many of its traditional rivals.

On a side note, if Doll is right about this link between demography and economic growth, will it be self-fulfilling? If it is true that one of the reasons that people in Europe and Japan are having fewer children is that the economic outlook is grim and people feel they cannot support more than one or two children, and if ageing, shrinking populations contribute to the economic malaise in these countries, then it seems an ever-reinforcing spiral of economic and demographic decline will ensue. Perhaps one way out of this dilemma is to start looking at children as a gift and not simply as a burden and drain on disposable income.