This is not your mother’s recovery. Women and baby boomers entering the American work force helped to supercharge expansions in 1975 and 1983 by filling an increasing number of jobs and purchasing more goods and services. Now as the share of women with jobs falls and older Americans age into retirement, the shrinking — or, at best, slowly growing — work force will weaken economic activity for the next two decades.
The demographic changes may be the biggest and least appreciated reason why the two-year recovery has slowed, because the rate of growth for labor and capital is “the most important determinant” of economic expansion, said James Paulsen, chief investment strategist for Wells Capital Management in Minneapolis.
More retirees mean slower household formation, reduced consumer spending and downward pressure on equity prices as retirement cuts people’s purchasing power, according to John Lonski, chief economist at Moody’s Capital Markets Group in New York, and Gus Faucher, director of macroeconomics at Moody’s Analytics Inc. in West Chester, Pa.
Household purchases rose at an average annual pace of 3.2 percent in the quarter century that began in 1972, when the oldest of the boomers turned 26, and averaged 2.8 percent since 1996, when they turned 50, according to Lonski. He forecasts the decline will continue, to between 2 percent and 2.5 percent a year, as growth slows for Americans aged 15 to 49.
“A weaker labor force does dampen the pace of the rebound,” along with “our expectation for what an expansionary trend is,” said Dean Maki, chief U.S. economist at Barclays Capital Inc. in New York. “We should be lowering our sights on potential GDP compared to when our population was younger.”
