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Linking Recessions To Demographics (Part 1 Of 2)

Recessions Tend to Occur 28 Years After the Start of Sharp Declines in the Birthrate: A Theory Linking Cycles in the Economy to Demographics

The national economy is driven by demographics. The purpose of this essay is to show a connection between a decline in the number of births within the economy and a subsequent decline in economic activity when there will be fewer adults forming households. Simply put, aggregate demand for goods and services will fall, when the number of individuals with increased spending on household formation falls.

Demographics reveal that men marry at an average age of 26 and that women marry at an average age of 25. The finances of an individual who is single may not require budgeting. The need for budgeting increases when the expenses of two people are combined in a common residence. The subsequent decision to raise a family will cause careful review of the finances for increases in spending. A budget is something which could have been neglected up to that point.

Six recessions, beginning in 1990 and going back to 1945, are listed in Figure 2. There are five recessions which have been excluded from the chart, for special consideration: The 1980-1982 recession; the recessions of 1957 and 1960; and the recessions of 2001 and 2008-2009.

Figure 1

Figure 2

The recession which began in 1980 happened as demand from consumers fell when they were literally priced out of the market by inflation. Demand fell when consumers could no longer afford the prices of the products. This supports the theory here outlined, which is that recessions are linked to falling demand.

The recessions which occurred in 1957 and 1960 are also linked to falling demand. Unlike the 1980-1982 recession, the recessions in 1957 and 1960 are linked to falling demand by a sharp decline in the number of births 28 years earlier. The decline happened from 1929 to 1932. There have been similar drops in the number of births since this period but there have not been drops to such a low level on an absolute basis. The four-year period of declining births are the four years which led to the nadir in the part of Figure 1 (sourced from The Age Curve by Kenneth Gronbach) which is the Silent Generation. Demand from the Silent Generation fell off rapidly from the previous generation.

The recession of 2001 and the 2008-2009 recession were associated with bubbles in sectors of the economy. The tech boom of the 90's resulted in stratospheric valuations on the share prices of companies in that sector. A recession followed the collapse in the prices of those shares. The recession of 2008-2009 was linked to a bubble in the housing sector. Derivatives and mortgage-backed securities had increased to a ratio of $50 for every $1 that was being used to purchase a home loan.

The housing industry had the implicit backing of the federal government through Fannie Mae and Freddie Mac. There were also broad economic policies enacted to grow the industry. The 50:1 leverage was enough to have an impact on the entire financial system when housing prices fell. Falling prices resulted in the Subprime Mortgage Crises.

The recessions of 1957 and 1960 have been linked to alterations in monetary policy. Monetary policy was tight in the two years which preceded 1957 and was then eased at the end of the year. The recession of 1960 occurred after the Federal Reserve began raising interest rates in 1959. This is in contrast to endogenous developments in the economy such as a tech bubble or housing bubble.

Works Cited

Gronbach, Kenneth W. The Age Curve: How to Profit from the Coming Demographic Storm. New York: American Management Association, 2008. Print.