Recent stories have characterized the sudden slowdown in the demand for new homes as being “abnormally declining” and a threat to the economic recovery. Reasons for the decline in home construction range from higher prices to competition from existing housing. While this economic recovery has been slow by historical standards, it is not out of line by the standards of recessions that were started with financial dislocations.
What is unique for this recovery is that it is occurring with the backdrop of sharply slowing population growth. As recently as the decade from 1990 to 2000, the population of this country increased 13.2 percent. From 2000 to 2010 the increase slowed to 9.7 percent. Currently this decade, the population growth is decelerating further, to currently 0.71 percent per year, down from 0.83 percent in 2011. At this rate of deceleration, the growth of the population in the period 2010 to 2020 will be about 7 percent. This will mark the slowest growth of population since the 1920-30 decade, which was characterized by the Great Depression. On a current population of about 309 million, the difference between a decade growth rate of 13.2 percent and 7 percent is about 19 million consumers.
This slowdown is not the result of a declining birthrate. Indeed, the US population has not been sustaining itself for some time, with a low birth rate not supporting the population. The slowdown is actually the result of a more aggressive anti- immigration policy, which has resulted in immigrants to this country both less likely to come and less likely to stay.
The perception and reality of immigration are two different things. Take the current hysteria over the “porous” nature of the southern US border. According to the global security analysis firm Stratfor, in 2013 there were 420,789 people apprehended trying to cross the US border on the south. This compares to 1,160,395 apprehensions in 2004. Between 1976 and 2010, the Border Patrol apprehended an average of 1,083,495 people per year. Thus, politicians are attempting to create fear out of a trend that is already improving.
The composition of those crossing has also changed. Earlier, it was people of Mexican nationality that were the most likely to try to come to the US. Now, it is more likely the apprehended will be from Central America, where a breakdown in civil law is causing thousands to flee countries such as Honduras and Guatemala.
So far as these people being “terrorist,” they are more likely to be the victim of terror than a perpetrator. Indeed, in spite of any number of stories of terrorists using the southern border to gain access to the US, there are more documented cases of terrorists using the Canadian border for this purpose. The idea of Mexican drug gangs teaming up with terrorists groups for the right price is the stuff of Hollywood movies. Drug cartels are businesses. They have seen firsthand the efforts of the US to ferret out and destroy any and all that are associated with a terrorist act. For the drug lords, there is not enough money to compensate them for that kind of attention.
So much for the stereotype. How about those immigrant students who toil away in the nation’s colleges and universities, obtaining advanced degrees more often than not subsidized by the US Government? If they cannot get proper papers, they are forced to return to their homeland upon graduation, even if US employers have a use for their degrees here. On a less exalted level, famers watch their crops rot in the fields because there are not enough pickers, and nursing homes to hotels cannot find enough staff.
One can argue that immigrants compete with citizens for jobs. However, many of the jobs assumed by immigrants are not attractive to citizens at the prevailing wage. How many Americans want to do landscape work, janitorial cleanup, or the like? At some price, perhaps. But such a price invites inflation of the worse kind, when wages are increased due to a shrinking pool of qualified workers.
How do other countries deal with immigration? In a word, pragmatically. Use of worker visas permits employers to secure foreign labor so long as it is needed. The visas have limited time, usually 1-3 years. If a recession occurs and there is no work, they go home. All visa workers are protected by wage and hour laws. It is illegal for an employer to pay them less than any other person for the same work, or otherwise exploit them. Immigrants are not allowed to sign up for government retirement benefits unless they become citizens, even though they support the same with their withholding taxes. They are entitled to health care, once they start work.
Thus our immigration policies, especially since 2001, have inhibited economic growth and laid the groundwork for higher inflation, as businesses discover that the labor pool is not as deep as the numbers suggest. Both political parties know this. But Democrats refuse to address the issue, preferring to make changing it a source of campaign funding. Republicans do the same, as champions of the status quo. Meanwhile, the growth rate of the country slows, our population ages and the foreign- educated lend their talents to other countries. Cable TV invents yet another “crisis” which keeps people listening between commercials. This is not a problem in search of a solution. It is a solution in search of the leadership necessary to have it implemented. Not the same thing.
Economic activity, outside of housing, continues to improve. Consumers are still under pressure from a lack of wage gains, but the rising number of employed is beginning to be felt in industries such as autos and transportation.
While longer-term growth rates are being scaled back, there still seems to be positive economic momentum, especially in parts of the country that still experience population growth. (Political leaders and policymakers: take note). Thus urban areas grow faster than rural, and the south and west grow faster than the midwest and northeast. Due to the current water crisis in the west, it remains to be seen if this dynamic changes.
Interest rates continue to be at very low levels. This is the product of a sort of schizophrenic stance taken by the Federal Reserve. On one hand, the cost of borrowing is at record lows. On the other hand, the standards for qualifying for a loan have not been higher. In this sense, the Federal Reserve seems to be afraid of the inflationary implications of their own policies. This being the case, it would seem that higher rates with a loosening of the loan standards would be in order. Savers would appreciate the lift.
Inflation seems ready to bounce upwards with the decline in employment. As the unemployment rate goes below six percent, expect businesses to become more aggressive in their staffing. This will, in turn, make wage inflation turn higher.
Aside from increasing the supply of labor through immigration, there is not a lot government can do to offset this trend. Either we get higher wage inflation without immigration, or higher growth with immigration. We are unlikely to achieve both, given the age of the population. According to the Census Bureau, in 2000 the median age in the US was 35.3. In 2010 it was 37.9. The higher the median age, the more retirees and disabled as a percent of the population, and the lower the percentage who work.
The Stock Market
After what some describe as a strong first half, the market has again stalled out. Much of the activity has come from corporate take-overs and buyouts, as cheap money is doled out to large corporations who do not seem to have to qualify for loans in the manner of individuals.
While such activity supports the stock market by shrinking the supply of stock available for purchase, it also shrinks the number of stock owners. It would seem that at some point the funds will find their way to more productive enterprises than cash. Whether the cash holders will be comfortable with the risk that accompanies the higher returns is debatable. Thus higher interest rates may be more of a competition for stocks when they eventually turn up, as they eventually will.
Warren M. Barnett, CFA July 29, 2014