The US labor force is not growing fast enough to sustain high growth levels. It is also aging, which will require retraining of workers to boost productivity.

Interview Transcript

How are shifting demographics affecting growth?

Shifting demographics are affecting the economic outlook right now. 10 years, 20 years ago when our long-term outlook demographics were something we included and we didn't really care about at all. Nowadays we don't have that luxury. We're seeing the impact of demographics on the economic growth forecast in lots of difference ways. The biggest one probably is with the labor force growth. Before the great recession, before 2007, labor force has grown by about a million and a half people per year. Since the end of the recession, labor force has grown maybe 200, 300 thousand per year on an average. Now, we shift to the employment data. A good employment month is about 200 thousand jobs per month, so we're only getting enough labor supply to cover one or two months' worth of growth. Either the unemployment rate has to fall fast to full employment and trigger inflation, or we need to do something about the labor supply to get more people into the labor force to sustain this sort of growth. This is one of the impacts that we're looking for in determining our forecast. In fact, we believe going forward, we'll get that supply reaction in a few months once people are even more comfortable then they are now with doing a job search and that job search will be completed successfully.

Another way the demographics is impacting the economic outlook, is through household formation. Of course, as we're getting older and older, the tendency to group together in households is also coming down as well. Poor wage growth, low marriage rates, there are lots of other thing helping this trend down, but household formation now is also at lows that we typically view as recession like here as well. So it's something that we may need to deal with going forward, it's something that could be staying with us.

Another impact of demographics, of course, is government spending patterns. If we look at where government expenditure growth is, it's in transfer payments, it's in income support, it's in healthcare support; all of the things we are going to need when we get older. The discretionary programs that aren't involved with this. Those are typically growing one or two percent at best. That would be defense spending, we're spending on infrastructure, roads and such. So we see demographics everywhere. And it's been a challenge to adjust our forecast to that. We think we've successfully done it, but it does have a lot of ramifications.

What adjustments should be made?

There are several adjustments that need to be made to make sure that the economy can adjust to the shifting demographics. The biggest one, quite simply, is we're all getting older, we're forecasting that each one of us is going to age about one year per year, and we need to adjust for this. Quite simply, this will involve extra training, it'll involve adaptation of employers to make sure that they can hire and successfully utilize those over 50 years old. The other adjustment that has to be made comes from the business-side as well. As we get older, especially after retirement, our spending patterns change dramatically. Total amount of money available to spend goes down significantly - but the pattern of spending goes down as well. The amount of discretionary income that's available for recreational types of things is much less, and a greater percentage of that income is focused on the staples of life: food, clothing, and maybe a trip or two to visit your kids or your grandkids. But those changing expenditure patterns are going to be what's driving our retails sales and our consumer spending forecasts in the coming years.

Doug Handler, Chief US Economist, IHS Economics

This article was published by S&P Global Commodity Insights and not by S&P Global Ratings, which is a separately managed division of S&P Global.