The Fed: From Foe to Friend

While our Outlooks typically cover what we expect in the coming quarter or year, investing is typically done with a longer horizon in mind. The good news is the stage is currently set for long-term growth. That growth may not happen for a couple of years, but in the interim we may see certain themes develop. Timing these developments can be difficult: there can be setbacks along the way, and sometimes they develop so slowly you don’t necessarily notice them until it’s too late.

As the name implies, baby boomers created a surge in the population when they were born. But since then, population growth has slowed, and baby boomers are hitting retirement at an increasing rate. From January 2000 to September 2023, the population of those over 55 years old increased by 75%, or 42.8 million. Over that same period, the population of 25–54-year-olds (prime-age workforce) only increased by 6.5%, or 7.8 million. This has many implications, especially for the labor market.

With “Help Wanted” signs seemingly everywhere, and more job openings than people looking for work, one might question where all the workers went. In part, they retired, which is good news for them, but when paired with slowing population growth it creates a disparity that’s bad news for economic growth. This isn’t just a problem for the U.S.—it affects most developed countries, and it’s not going away any time soon. The silver lining is that with challenges come opportunities.

One opportunity came in the form of the CHIPS and Science Act, passed by Congress in August 2022 and providing roughly $280 billion in new funding to boost domestic research and manufacturing of semiconductors in the U.S. The race for artificial intelligence to boost productivity--and counterbalance the world’s aging population problem—has already begun. Additionally, as the aging population shifts from stocks to bonds for more stable income, they could play a role in lowering long-term bond yields. Lower bond yields are a catalyst for growth, good for bond prices, and thus good for bond returns.

The U.S. may also be able to capitalize on lower energy prices and its ability to be energy independent with its abundance of cheap natural gas. As energy prices rise in Europe, it becomes more economical to manufacture and transport gas within the U.S. to accommodate its large base of customers. With the world increasingly conscious about carbon emissions, manufacturing goods in North America could become more advantageous. Add to that the fact that carbon emissions are a global problem, and exporting pollution to other countries with lower emissions standards may eventually gain added scrutiny. We are already seeing the groundwork for another domestic manufacturing boom, with construction spending on manufacturing facilities in the U.S. more than doubling since the start of 2022.