Saturday, June 26, 2010

What Happened to the Pyramid Chart?

The Census Bureau Pyramid Chart looks more like a minaret these days.

In studying population trends, statisticians draw what is called the "age pyramid" which is a chart showing population breakdown by age and gender. Since World War II until recently, this chart was a pyramid, and a rather fat one. The post-war "Baby Boomer" generation serving as the fat base of this pyramid.

But since the Baby Boom generation, what has happened? As the above-chart illustrates, population growth in the United States has largely stagnated. Why is this important? How does it affect you? Let's talk about it.

One fundamental problem with our economic engine worldwide is that it has always been based on growth. An ever-increasing population means more jobs for people, to grow food, create infrastructure and support the increasing population. When populations increase, generally economies thrive.

As demand continues to rise, valuation of property increases over time. We've all seen this in our own lives, as the small towns we grew up in morphed into suburbs or cities, and the "vacant lots" or farmer's fields became housing developments or subdivisions. As more and more people occupy an area, property values increase. If you are a homeowner, this is a good thing, of course.

But what happens if the population growth tapers off or shrinks? That might be good for the planet overall, but in terms of economics, it can lead to stagnation, as growth tapers off and demand flattens.

The chart above was made in 2005. We'll have a new chart to look at in 2010, when the census is completed. However, you can project what the data will look like by moving the numbers up the age chart by five years from the dates in the chart above. The Baby Boomers are all between 45 and 65 now, and entering retirement age. We can easily project that demand for elder care, retirement communities, and strain on the Social Security system will increase over the next 10-20 years.

And we can easily figure out that the Boomers, who spent the 1990's and 2000's spending it faster than they made it, are starting to panic about now, and trying to sock away more money for retirement. This may be one reason that economic growth is stagnating and spending is down. Buying a yacht in 2005 seemed like a swell idea. In 2010, it seems foolish.

But moving down the chart, you can see that the generations behind the "Boomers" are slightly smaller. Not by a lot, but by enough. As a result, demand for everything from houses to cars to food may flatten as the Boomers age and start to die off.

"But Wait," you say, "Population is actually increasing!" And of course, you are right. As the fat bulge of boomers floats up to the top of the chart, the subsequent generations (which are showing flat growth or a slight decline) will work their way up as well, which has caused the population to swell. The rate of growth in the boomer generation is died off, but we still have a large population.

But bear in mind that one reason they call this an "age pyramid" is that people do DIE eventually, as reflected by the pinnacle of the pyramid. The Boomer segment will shrink in the next 10-15 years until is is the same width as the generations after, at which point the "pyramid" will look like a cylinder with a pointy hat on it. At that point, population growth may halt and start to reverse.

The second thing to bear in mind is that as each generation matures, it goes through phases in life where demand for products changes, and this demographic information is important in business and in personal finance.

So, for example, when the Boomers were born, demand for neonatal care (a term not invented then) spiked. And the young marrieds who gave birth to the boomers demanded houses in the suburbs. And as the Boomers grew up and went to school, the US engaged in an orgy of school construction (a huge share of school buildings in this country date from the 1960's to 1970's as a result). And as they all reached college age, well, the "Age of Aquarius" dawned upon us.

And so on and so on. They later morphed into "Yuppies" and bought larger houses and luxury cars. The points is, there are certain things you can sell to people at certain ages in life, and not to others. A college education can be "sold" to an 18-25 year old, but is a tough sell to an 80-year old.

And as I noted in my College Bankruptcy posting, as the target age demographic for college educations shrinks, colleges and universities are increasingly seeking overseas students and "returning students" or "non-traditional students", the latter of which are euphemisms for "older people."

As the population ages and the base of the pyramid stagnates and partially thins, demand for many younger-age services and products will shrink or are shrinking. School enrollments are down in many parts of the country, and some school districts are consolidating schools.

We may see demand for many other youth-oriented items shrink as well - and perhaps this explains the collapse of the music industry as of late. Older people already have all their music on CD or iPod or computer, and are least likely to be interested in "new" music forms (the older generation always hates the tastes of the younger). Baby Boomers fueled the Rock and Roll music movement of the 50's, 60's, and 70's. Today, we still listen to the same music on the radio. Even young kids "rock out" to tunes I heard as a child over 40 years ago. It is a disturbing trend, a sort of cultural stasis.

Granted, there are some commodities that might appeal to people of different age groups. A small starter home might appeal to a 28-year-old or might be a "downsized" home for a 68-year-old. But often, location determines the age target. So right now, demand for senior housing in "The Villages" in Florida is on the rise, as the baby-boomers all retire. And thanks to the downturn in the economy, prices are thankfully affordable. But as the Baby Boomers get older, and the base of the "Pyramid" shrinks, demand for Senior housing will drop off, and we could see a retreat in demand and pricing.

According to the chart, the widest point in the "Boomer" pyramid is at my age - 50 - or people born in 1960. The age distribution remains flat after that, and then shrinks back to a minimum about 20 years later, or people born in 1980. What does this mean for me personally? Well for starters, if I buy a retirement home in an "over 55 community" later in life, chances are, the demand for such homes will slacken as I get older. So it is possible that a retirement home I buy now may be worth less later on (or not appreciate as much).

Similarly, demand for other "retirement goods" may decrease or flatten in value - or may already have. Demand for motorhomes, boats, golf course memberships and other retirement gear may decline in value over time. And perhaps this present recession is a reflection of this demand slackening already.

One puzzling effect of the pyramid is that housing in many retirement areas did shoot up in value during the real estate boom, and then shot back down again during the bust. If baby boomers are just now reaching retirement age, demand should still be high. Why is the opposite appear to be taking place?

I think the pyramid has the answer there as well. If you look at chart above, which was a snapshot of our nation's age distribution at the height (or near height) of the Real Estate bubble, you can see that the number of retirees or potential increased dramatically from the age 70 to age 60 levels. Granted, part of the pyramid nature of the pyramid is due to people dying off, but if you look higher up, you can see that the ages flatten for a while. In other words, the rate of change (first derivative) of the age distribution peaked rapidly in the early 2000's as pre-boomers started to retire (Many refer to these folks as the Korean War generation or the "silent generation").

When rates of change of growth increase suddenly, people may get mixed signals in the economy about real growth rates. Suddenly, it seemed, everyone wanted to move to Florida, and there were not enough houses to go around. So everyone and their brother started building, and a lot of people started the buying and flipping of properties. As I have noted time and time again, a small change in demand can cause a huge swing in pricing. And a large change in demand, even if it is an instantaneous "spike" can cause a bubble. It is basic control theory.

As demand increases yet again, does this mean we will see another spike in Florida Real Estate? I think not, actually. Since most of Florida was overbuilt, the incoming wave of baby boomers will soak up much of this surplus inventory. And there is evidence to suggest this is indeed happening in Florida, but on a very quiet basis. In addition, since prices became so obscene, many retirees decided they couldn't afford to retire there and looked elsewhere. It is only now, that prices have stabilized, that many are giving Florida a second look. In addition, as people become "gun shy" about Real Estate, the cultural memory of the 2008 bubble will act to suppress prices.

But it should mean that demand will continue to rise for retirement-related products, and, down the road, elder care services (expect a bubble in that sector soon, as too many folks jump into the market). The RV market, after taking a savage beating, will bounce back slowly over the next decade, only to see a slump when my generation decides to "sell due to illness". Long-term growth in that sector may rely on marketing downsized rigs that are good on gas and also have a cross-generational appeal.

And that is one key, I think, to the secret of this pyramid. Since the base is a large cylinder, there will still be substantial demand from younger people for products and services over time. So a starter home or moderately priced home will continue to be in demand, as a 28-year-old can afford it, and a 68-year old might want it as a down-sized "empty nester" house. But demand for showboat mini-mansions may slacken, as this segment of the population (Successful 40-60 year olds) flattens out or declines.

Immigration is one element that can affect how this pyramid works. During the Clinton years, we saw a boom in immigration and also a boom in the economy. Increasing population usually means increased employment and growth in the economy. Lately, the anti-immigration fever sweeping the country has meant that immigration is down, particularly illegal immigration. And ironically, this decrease in immigration won't "fix" the economy, but actually make things worse. Immigration could help increase the population base and thus increase demand in the economy, leading to more employment. But due to politics, that ain't about to happen anytime soon.

And as our Pyramid becomes top-heavy, what will this mean for the economy? Traditionally, the elderly formed a small portion of our communities - the smaller peak of the pyramid. The cost of caring for the elderly was relatively small compared to the overall economy. But as the ranks of elderly have swelled, they will become more of a drag on the economy, as they spend but do not produce.

This burden was largely responsible for the bankruptcy of General Motors. The shrinking market share and staggering overhead of the company finally combined in 2009 to force the company into insolvency. One huge aspect of this overhead was the retirement pensions and health care plans retired workers. Since market share had dropped (from 60% of the market to less than 30%) the number of retirees exceeded the number of active workers - by nearly double. As a result, the labor overhead was staggering, particularly compared to overseas competitors and younger companies, with no large retirement base (or retirements funded by 401(k) type plans and health care provided by government). When you have two retirees for every worker, an economy cannot survive long.

We may not see this scenario exactly played out in the overall economy, however the percentage of retirees as a part of the overall population will increase. And the Baby Boomers may live longer, simply due to better medical care, fitness programs, better diet, and the like.

And already, we have taken steps to partially ameliorate this problem. Retirement age has increased for many, to 70 years, instead of the traditional 65. "Full" Social Security benefits don't kick in until age 68 now. In the future, we may see these numbers pushed up even further. And many retirees are finding that part-time jobs are necessary to enhance their retirement. The model of retiring and working full-time on your golf game may be a thing of the past.

There are probably a billion other things you could draw out of this pyramid and other statistical data. The point is, demographics is a huge indicia of demand for a lot of products, and many of the "talking heads" you see on TeeVee blathering on about the economy never bother to take this into account. You can cut taxes or raise taxes, increase or decrease spending, raise or lower interest rates and "Big M" all you want, but if you live in a country with a declining population base, that, above all else, will dictate how the economy works.

When the results of the 2010 census are released, it will be interesting to see how the "pyramid" above has morphed. And it will be interesting to see how the Baby Boomers age. Will they live longer

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