Morningstar Advisor - April/May 2010 - 35

... But With Plenty of Silver Linings
By Robert Johnson

Of the themes that might emerge over the next decade, four stand out: a declining U.S. workforce, increased productivity, shifting demographics, and more health-care spending. Many investors are worried that job creation and job growth won’t be able to keep up with population growth, but the growth rate of the working-age population—age 21 to 62—is about to go off a cliff. (Note that I say the growth rate, not absolute numbers.)

Change in U.S. Working Age Population (age 21–62)
Decade Annual Avg. Change

1980s 1990s 2000s 2010s 2020s

1,007,000 882,000 702,000 –3,000 218,000

Given the declining growth of the workingage population, it is admirable that U.S. productivity gains were so robust during the past decade. The United States trailed only Korea, Taiwan, and Sweden in 2000–2008 productivity growth. With higher educational levels, new spending on technology, and better use of software and machinery, the United States must continue to improve productivity. It not only mitigates the impact of our aging population, but it also means that U.S. goods and services will be at a competitive advantage in the global marketplace, creating more export opportunities and growth for the economy. Some U.S. consumer staples firms, such as Pepsi PEP and Coca-Cola KO, are already benefiting from increased opportunities overseas, especially in China and India. But even with better productivity, the U.S. economy faces some demographics challenges. For all his economic predictions, author Harry Dent has one legitimate concern. Dent, whose work correlates age groupings with consumer spending, posits that consumer spending tends to top out at around age 50 as incomes rise and young children come of age. The number of 50-year-olds has recently peaked and will decline over this decade, implying that U.S. consumption might be in for some more weakness, which would be bad news for general-merchandise retailers that lack a special hook to draw in consumers. Of course, events such as marriage and births can shift to different stages of life, upsetting some of these buying patterns. It’s also easy to overgeneralize. Although aging demographics suggest a slow economy, specific goods may be in a different part of the cycle. For example, the

age of the typical first-time homebuyer ranges from 33 to 34. That age group was at its nadir in 2009 and was a contributing factor to poor starter-home demand over the past four years. Over the next 10 years, however, the population of this key group will expand each year, adding a bit of a tailwind to the first-time homebuyer market. A final theme for the next decade is health care, which will be a key driver for the economy. Health-care spending today represents 17% to 18% of GDP, up from the mid-single digits 50 years ago. In the decade ahead, many economists expect health-care spending to grow at a rate of 6% to 7% per year, while the economy grows at a slower rate, 5% or so. At those rates, health care could become 25% to 30% of GDP in the next 10 to 20 years. Some economists take a negative view of such an increase. I am not so sure. Health care is a substantial contributor to employment growth. It was one of the very few sectors to show job growth during the recession, and it creates jobs across a wide range of social and economic sectors, from highly skilled brain surgeons to less-skilled orderlies and janitors. And these are jobs that cannot be easily outsourced to foreign countries. Good health care also enables workers to spend more time working and less on recovering from illnesses. Healthy retirees spend more on leisure and travel. Exactly how we pay for our medical needs remains an issue, but health care could prove to be a compelling investment theme in the years ahead. K
Robert Johnson, CFA, is associate director of economic analysis with Morningstar.

Excludes immigration; based on birth rates only. Source: U.S. Center for Disease Control, Morningstar calculations.

If the labor force shrinks in the 2010s, companies that make the remaining workers more efficient will benefit. Rockwell Automation ROK and ABB ABB, for example, are both known for their industrial robots. The entire business model of Illinois Tool Works ITW is based on helping automakers and other manufacturers reduce the amount of labor required to make things. Technology companies such as Salesforce.com CRM and Oracle ORCL continue to create software that helps businesses reduce the number of office workers and allows them to efficiently target and measure their market segments.

MorningstarAdvisor.com 35

http://www.Salesforce.com http://www.MorningstarAdvisor.com

Morningstar Advisor - April/May 2010

Table of Contents for the Digital Edition of Morningstar Advisor - April/May 2010