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Family cycles driving the world’s economy

We are truly an empty nest now. Our daughter married last year and left for the final time. It’s a strange feeling knowing that those child-rearing days are over. We’ve spent so many years scrimping and sacrificing to give her a good life. Now that we’ve reached a certain amount of success in our careers and a stability in our financial situation, there’s no one to focus on.

You’d think all those years of sacrificing would leave us with a laundry list of things to buy. But the truth is, we don’t really want that much anymore. We prefer our old, comfortable clothes to new, trendy ones. We have no desire for the latest model automobile. We’re trying to give away furniture, so forget buying something new. The only purchases we make these days are to replace something that’s worn or broken down.

Somewhat backwards

At this time in our lives, we are consuming less than we earn. I’ve often said that life is backwards. When you’re young and trying to make your home and your family, that’s when you need more money. And that’s exactly when you don’t have any. By mid-life, you start to get comfortable financially, but you just don’t need as much money anymore… backwards.
Turns out, the family life cycle has a lot to do with the economy and the stock market. Population growth and demographic trends drive economic activity.

At the fourth-annual CFA Forecast Dinner earlier this month, that theme was echoed by our expert panelists, but on a grander scale.

Harry Dent of the H.S. Foundation was our economic specialist. He writes books on economic trends and is bold enough to offer forecasts for the next two decades. Robert Hagstrom was the equity specialist. He is a portfolio manager for Legg Mason Growth Trust and has written books on the great stock investor, Warren Buffett. Dave Rolley represented fixed income. He works for Loomis Sayles. Most bond guys are pretty bland, but not Dave. I’ve never seen a bond guy entertain a room like he did. Finally, Jim Barksdale served as the Mississippi expert. His success in Silicon Valley and his commitment to education in Mississippi made him an excellent choice.

All agree that population growth drives the economy. China represents 20% of the world’s population and is 16 times larger now than it was in 1979. Their economic boom has followed the population explosion. As a result, they consume twice the amount of oil now than they did in 2000.

Dent points to the situation in Japan, where the population has aged considerably. As the population ages, spending declines and savings increase. A young family spends more than it saves, and it is spending that drives markets, not savings. With this comes, naturally, a slowdown in the economy. In Japan, the result was a decline in housing values of 60%.

In looking at the situation in the United States, panelists point to continued growth in our economy until the end of the decade. At that time, the baby boom generation will begin tilting in favor of savings versus spending. This ratcheting down will bleed over into the stock market, maybe into our real estate market, as well. According to Dent, the boom ends when Baby Boomers run out of spending capacity.

But what about the rest of the world? China and India are still young, by comparison. The slowdown will hit the Western world first. Gradually, as the populations of China and India modulate and begin to age, their economies will slow, as well.

But, we have a few good years left in us. And Hurricane Katrina is actually fueling growth in Mississippi right now. Barksdale called it an event that was bad for us socially, but good for us economically. Federal money has poured into the area. The rebuilding of destroyed areas means jobs, and the labor market on the Coast is extremely tight because of this situation. In fact, Barksdale came out in favor of an increase in the minimum wage, in part, because he believes the effect will be minor due to the tight job market.

Competing globally

Ultimately, though, our ability to wring the most we can out of the next few years depends on our ability to compete in the global economy. For Mississippi, that means having a labor force which can perform in the brave, new world.

Here, Barksdale has put his money where his mouth is. So far, the Barksdale Reading Institute has spent $47 million to teach children in Mississippi to read. He says it’s a daunting task but an important one. If a child can’t read by the third grade, his chances of success are minimal.

For countries where manufacturing is still going strong, all you need are warm bodies. Population drives these economies. For the United States, where service and technology are ruling the day, it is the educated population that drives the economy.

Back to my empty nest…

It is the next generation who will shape our country and our economy. The future lies in the hands of our children and grandchildren. Did I say grandchildren? Yes, yes, yes. We need grandchildren! Now, there’s something to spend money on! I think I’ll start buying baby clothes now. Should I go blue or pink? Oh, what the heck. I’ll do both! After all, I’m just trying to do my part.

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