Compass Points: Economic Commentary

Growth & Prosperity: Productivity & Demographic Factors

What is driving the current economic prosperity in the United States?

Nine years of expansion, low inflation in wages and raw materials, and high employment - what is driving this growth? Many important factors include: free trade, capital availability, the declining power of US labor unions and decreased inventory cycles to name a few. Two important factors that we have not explored in past Compass Points issues are the underlying demographic trends and overall productivity improvements.

Harry S. Dent, Jr., author of The Roaring 2000’s, graphs the demographic shifts and looks at historical spending patterns by age of the populations to forecast long-term economic growth.

Graph 1 This demographic pattern generates the following spending pattern: Spending increases as one progresses through ages 20-30 and spending peaks at around age 46.5.

Graph #2 Dent predicts that as the baby-boom generation moves through this spending pattern it generates significant consumer demand generating growth through the year 2009.

In addition to demographic changes, productivity allows for economic growth with low wage and raw material inflation. These productivity improvements are largely driven by investment information processing equipment.

Graph #3 This graph shows how investment in information processing
equipment is directly correlated to the increase in the Dow Jones industrial average. Basic industries and service companies are unleashing the power of technology to enable more efficient, cheaper and faster products and services. This productivity enhancement will continue as companies harness the power of the Internet.

Graph #4 Compare this information revolution with the transformation that occurred in the 15th century when the Gutenberg press allowed for knowledge transfer to the mass population. Formerly, information was limited to those who had access to scarce manuscripts. The access to this information unleashed the imagination of the population in the 15th century.

Will the advent of the Internet combined with enhanced and affordable computing power unleash a similar revolution in the 21st century? Access to information and distribution channels will speed the progress of developing countries.

Demographics and productivity combine to make the long-term outlook bright. This does not mean that all industries will thrive in this positive environment. What can you do to take advantage of these
trends as you plan?

Analyze the importance of these demographic shifts to your markets and to your customers’ markets.
Assess your customers’ changing informational needs. What was good last year will seem like Stone Age next year.
Will the Internet provide a new distribution channel for your business? How can you take advantage of this channel to penetrate international markets?
How can you use the Internet to raise your company’s visibility throughout the world?

International Demographic Trends
While the long-term outlook in the United States is bright, what about the rest of the world? Mr. Dent analyzes the impact globally finding:

Canada, Australia and New Zealand: demographics will drive growth much like the US.
Europe: growth will be slower than the US, however the trend will last longer; into the year 2013.
Japan: demographic growth is counter-cyclical to the US; growth will begin again in 2008.
Far East: demographics will drive significant growth.
South America: demographics will drive good growth.

While demographics are only one indicator of economic growth, it is one that can be predicted with accuracy far into the future. This demographic growth, combined with productivity, indicates a favorable
environment in the long-term. In the short-term this growth may be interrupted by specific events that cause disequilibrium in the economy.

These events could include:

Overvaluation, over heating of the stock market and other financial assets, leading to a bust.
Interest rate hikes by the Federal Reserve Board.
Specific commodity shortages that may occur as developing economies recover or an international crisis limits their availability.

As you develop your Industry Scenario and Winners’ Profile take into account the long-term impact of demographic and technology trends. This will help you expand your thinking beyond the foreseeable future.

Reference: The Roaring 2000’s, Harry S. Dent, Jr., Simon & Schuster, 1998. (For more information, or to order your copy, visit Amazon.com)

Denise Harrison lives in Wilmington, North Carolina and is a consultant for the Center for Simplified Strategic Planning. She presents the workshop, Simplified Strategic Planning for Small to Mid-Sized Companies. For more information about Denise, check out her bio page.

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