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How an imminent baby boom could propel the U.S. economy

MarketWatch logo MarketWatch 11/20/2021 Mark Hulbert
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The U.S. may be on the verge of a baby boom.


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You read that right: Contrary to the predictions of many media reports over the past two years about a “baby bust,” there are early signs of an imminent baby boom.

If these early indications pan out, it would be a positive omen for the economy’s long-term future. In fact, it would be difficult to overestimate the long-run economic significance of a new baby boom. Consider how Loretta Mester, president of the Cleveland Federal Reserve Bank, put it at a 2017 conference when summarizing research into demography:

“Demographic change can influence the underlying growth rate of the economy, structural productivity growth, living standards, savings rates, consumption, and investment; it can influence the long-run unemployment rate and equilibrium interest rate, housing market trends, and the demand for financial assets. Moreover, differences in demographic trends across countries can be expected to influence current account balances and exchange rates.”

Unfortunately from this point of view, the U.S. birth rate has been coming down for decades. Many anticipated an uptick in the U.S. birth rate to show up late last year and earlier this year, on the theory that with everyone working and staying at home during the pandemic, fertility would be “encouraged.” But, as we now know, that didn’t happen — at least, perhaps, until now.

The accompanying chart, below, plots the most recently available data, courtesy of data compiled by the Max Planck Institute for Demographic Research in Germany and the Vienna Institute of Demography in Austria.

To overcome normal seasonal variations in the number of monthly live births, the chart plots the percentage difference of each month’s total relative to the comparable total from one year previously. Notice the plunge in monthly live births beginning nine months after the pandemic began.

Notice also the spike upwards in recent months, which began when the nine-month anniversary of the Covid19 vaccine became widely available. The latest reading — 3.3% — is the highest since December 2013.

The last couple of months do not make a long-term trend, needless to say. But I note that there are signs that these latest readings may be more than a fluke. One study, in the Journal of the American Medical Association’s JAMA Network Open, used electronic health records to project a “covid baby boom.”

Baby boom blip?

Even if we’re embarking as a country on a new baby boom, it’s impossible to know how long it will last. Alejandra Grindal, chief international economist at Ned Davis Research, said in an email that it’s therefore important to put the new baby boom — if indeed we can call it that — in its proper context.

Specifically, she noted:

  • If the recent uptick turns out to be nothing more than a “post-vaccine bounce,” then its net effect will be to bring the birth rate “back to where we were before” — back to the declining trend in births that pre-existed the pandemic.
  • We shouldn’t overlook the impact of just a year or two delay in couples having children. Even if their motivation in delaying wasn’t to reduce the total number of children they otherwise hoped to have, the delay nevertheless could have that consequence, since it “makes us all older. This could reduce the total number of kids households would have had without the pandemic.”
  • A third factor we shouldn’t overlook, according to Grindal, is that the pandemic set back women’s careers in the workforce. Research has shown that when women take off working, for whatever reason, their careers often never recover. This, in turn, means that, going forward, couples will have “less money to raise children.”
Demography as destiny?

For better or worse, demographic changes don’t immediately show up in GDP growth rates. An uptick in birth rates won’t translate into increased economy-wide productivity for 20 years or so. And it will be 40 or 50 years before those born this year will reach their peak earning potential.

When and how those future changes impact the stock market is a function of how far into the future investors focus. Researchers who have modeled demography’s impact on the stock market have not surprisingly found that it’s complicated and, in some respects, counter-intuitive.

For example, researchers have zeroed in on a ratio of the number of those middle-aged (ages 35-49) to those who are young adults (ages 20-34). The stock market tends to rise when this so-called MY Ratio is trending upward, and vice versa. Because of births that occurred in the U.S. over the past 50 years, the MY Ratio will be trending upward until the mid-2030s, according to Grindal.

What about the recent uptick in births? The earliest that it will affect the MY Ratio is 2041, 20 years from now. And furthermore notice that, holding all else constant, an increase in births this year will cause the MY Ratio in 2041 to be lower than it would have been otherwise. That’s because this year’s births will cause the ratio’s denominator in 2041 to be higher, which in turn reduces the value of the overall ratio.

Assuming the MY Ratio model continues to be a good guide to how the stock market responds to demographic changes, it won’t be until 2056 that the recent uptick in births will have a bullish impact on stocks, since that’s when the MY Ratio will be higher than it would have been otherwise. Though that seems like a long time for us to wait, notice that an increased number of births will continue to have this bullish impact for the subsequent 15 years — until 2071.

That’s squarely within the middle of the retirement years for those currently in their 20s. They in particular should be celebrating the recent uptick in births, and hoping it continues!

Mark Hulbert is a regular contributor to MarketWatch. His Hulbert Ratings tracks investment newsletters that pay a flat fee to be audited. He can be reached at mark@hulbertratings.com.

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