Population Clock Ticking Upward

It seems like only yesterday that a television commercial for a major fast-food company sang “Two-hundred million people, no two are quite the same ...” But it's been almost 20 years since the U.S. population numbered 200 million. Experts have been predicting for several months that the U.S. population will reach 300 million sometime during October.¹

Population trends are an important piece of the financial puzzle. Although it is unlikely that you will meet even 1% of the estimated 300 million U.S. residents, you are likely to be affected by their behaviors, especially with regard to spending and investing.

Not What We Used to Be

The U.S. population has changed considerably since we were a nation of 200 million. Here are some examples of shifting population trends.

The World According to Harry Dent

Population trends might make interesting reading, but some economists believe that they also can be used to forecast the direction of the economy and the financial markets. Harvard-trained economist Harry S. Dent is a leader in the field of demographic-based economic forecasting. One of the basic tenets of Dent's theories is that people tend toward certain behaviors based on their age and life stage. On average, people enter the workforce around age 19. They buy their first car and move into and furnish an apartment. Then they get married, and about two years later have their first child. They buy and furnish a starter home around the time the head of household turns age 34. Around age 44, they trade up to a larger home and fully furnish it by about age 47, when their children begin to leave home. After the head of household reaches age 47 or 48, family spending decreases as the household transitions to an empty nest.¹¹

So, what do predictable spending cycles of the average American family have to do with major U.S. economic trends? Population data show that the U.S. birth rate is not constant, but tends to form in peaks and valleys, with the peaks occurring about every 40 years. By combining information about common spending behaviors with U.S. birth-rate data, Dent theorizes that it's possible to estimate when large groups of consumers will engage in milestone spending behaviors, such as entering college, raising children, and buying and furnishing homes.

In particular, Dent points to the act of household formation, when a family buys and furnishes a residence, and feeds, clothes, and educates its children. Household formation accounts for a significant portion of consumer spending. When a large group of the population is engaged in household formation, the economy tends to grow. After these groups have moved beyond the ages most commonly associated with this behavior, the economy tends to slow.

Because the birth rate peaks about every 40 years, the economy tends to expand for a period of about 26 to 29 years, followed by contractions that last 12 to 14 years, according to Dent. The Henry Ford generation drove an expansion from 1900 to 1929, followed by a serious economic decline (the Great Depression) that lasted through World War II. The Bob Hope generation drove an expansion from the mid 1940s to the late 1960s, followed by recessions and high inflation in the 1970s and early 1980s.¹²

Today, the U.S. economy is in the midst of a significant expansion. Dent believes that this is because the largest segment of baby boomers (those born near 1961) are in their peak spending years. But he also believes that after this group begins to turn 48 in 2009, the U.S. economy could slow.

Remember that Dent's theories are plausible but not proven. The U.S. economy has been extremely resilient and able to adapt and even grow in the face of tremendous shocks throughout recent history. We've also seen evidence that today's U.S. population has evolved in ways that few people could have imagined, let alone predicted 40 years ago. Because of the many variables involved, an investor should not rely on forecasts without realizing their limitations. But understanding how population trends can affect the U.S. economy may help you make more informed personal financial decisions.

1) The Wall Street Journal, July 11, 2006
2–7, 9) Population Reference Bureau, 2006
8) Bureau of Economic Analysis, 2006
10–11) H.S. Dent Foundation, 2006, 2003
12) The Roaring 2000s, Touchstone, 1998