The Retired Investor: Fewer Babies Threaten Future U.S. Economic Growth.

The fertility rate in the United States has fallen by 3 percent since 2022. That is a historic low and marks the second yearly decline in a row. How will that impact the economy?

 

In the simplest terms, if you have lower population growth then you will have fewer people producing goods and services. That will result in slower economic growth. But it is not the only impact. A shrinking workforce will also mean there are fewer people paying taxes.

 

In a country like ours that has seen decades of increased spending and higher debt, the question becomes who will pay this growing obligation.

 

As our deficits expand at an increasing rate, while the birth rate continues to decline there will be fewer and fewer people to pay off the nation's debt burden. The Heritage Foundation estimates that the total amount of debt that a baby born in 2007 assumes was $30,500. That figure almost doubled to more than $59,000 just 13 years later.

 

From 2014 to 2020, the birth rate consistently declined by 2 percent per annum, according to the CDC's National Center for Health Statistics. Last year the birth rate in the U.S. reached a record low. Just 3,591,328 babies were born, which indicates that the birthrate has now fallen below the replacement level needed for one generation to replace itself. This was not supposed to happen.

 

Experts in the field will tell you that the COVID-19 pandemic was supposed to jump-start an increase in the American birth rate. The argument was that the lockdowns were forcing couples to spend a lot more time together indoors. That would lead to many a romantic evening and an increase in babies nine months later. The exact opposite happened.

 

The year 2020 hit a record low in the fertility rate at 1.6, the sixth straight year with a decline in the number of births. The facts are that ever since the Financial Crisis of 2008, births have been declining.

 

Experts point to a variety of reasons for this trend. Changing social norms, demographics, immigration policies, and a decline in teenage pregnancies are some of the most important reasons. Chief among them is that  Americans are delaying, or foregoing marriage entirely. And if they do tie the knot, women are marrying later in life. As a result, couples are having fewer children compared to prior generations. 

 

The Pew Research Center, in tracking birth trends in the U.S., found that some groups were no longer making babies as fast as they used to. Historically, fertility among Hispanics far exceeded that of other groups. However, that is no longer the case. Researchers believe a drop-off in immigration from Mexico has reduced the birth rate among Hispanics to levels more in line with the national average. 

 

Teenage births have also plummeted. The number of births has dropped in half from 10 years ago in this age group. Why? The Pew Research Center cites a greater awareness and use of effective contraceptives, as well as an increase in the number of teenagers who report never having had sex.

 

Lower birth rates are not all bad, especially at the state level. Many school districts are experiencing declines in enrollment. The decline in teenage pregnancies has helped offset some of the rises in health-care expenditures as well. Fewer people will also mean less pressure on infrastructure as well.

 

Whether or not those benefits will offset the declines in income, sales, and other tax revenues will depend on the state. Western states are experiencing the worst declines. Decreasing birth rates in Arizona and Utah, for example, are double that of the 50-state average.

 

Migration trends and a state's tax structure will also be important in mitigating the impact of slowing birth rates. States that are recipients of an influx of new residents from other states or abroad are better positioned to weather the storm. It should come as no surprise that the Northeast has lower fertility rates and more residents migrating elsewhere.

 

It also depends on where each state derives its revenues. Those most dependent on individual income taxes face greater risks than those who generate substantial income from other sources such as extraction of natural resources or corporate income taxes. States such as Florida, Nevada, South Dakota, Texas, and Washington which rely heavily on sales taxes, will likely need to change course in how they generate revenues.

 

In addition to these threats to future revenue declines, states will need to worry about their access to federal funding. Many of the largest federal programs allocate money according to formulas that include a state's headcount. Those states that show greater declines in birth rates may see their funding reduced at a greater rate than in other states.

 

In any case, the impact of low fertility rates won't be felt for several decades when today's children reach an age where they will be spending more and paying significant income taxes. But many nations in Europe and Asia in a similar situation are not waiting for that to occur. They have already developed policies to encourage more babies, while in this country the focus has been more on individual choice and freedom. 

 

Bill Schmick is the founding partner of Onota Partners, Inc., in the Berkshires. His forecasts and opinions are purely his own and do not necessarily represent the views of Onota Partners Inc. (OPI). None of his commentary is or should be considered investment advice. Direct your inquiries to Bill at 1-413-347-2401 or email him at bill@schmicksretiredinvestor.com.