A perverse effect of the continuing white-collar job cuts under way in corporate America is helping bolster the long-term outlook for stocks and bonds. Today`s economic fears are accelerating a demographic trend that appears to bode well for financial markets for the rest of the decade.
Simply and crudely put, for every sap getting pink-slipped or shoved into early retirement, there are thousands of corporate drones who are still working but scared to death they`ll be next. What will they do?
Traditional economic patterns suggest they`ll pay down their debts and pump up their savings. It`s already happening.
The jobless who must eat into their savings and run up consumer debt just to get by are far outnumbered by those still collecting a paycheck but who have reason to be anxious.
The resulting push toward frugality is in line with what`s likely to happen in the U.S. economy anyway, regardless of the current economic climate. Harvey Hirschhorn, executive vice president and economist at the Chicago investment firm Stein Roe & Farnham, has overlaid population trend statistics on top of economic indicators, and he likes what he sees.
The growth rate of people aged 25 to 49-call them the Big Spenders-is declining and will continue to decline in the years ahead. Also declining, not coincidentally, is the growth rate of non-financial debt, which means public- and private-sector debt minus the debt of financial institutions.
In addition, the rate of growth of people 50 to 64-call them the Big Savers-began turning up in the 1980s and will soar through the 1990s, as the accompanying graph shows. Concurrently, the growth of personal savings has turned up after declining since the mid-1970s. Hirschhorn believes the growth of savings will accelerate through the 1990s as the older Baby Boomers move into their 50s and 60s.
Hirschhorn acknowledges the current economic malaise spells great hardship for many Americans. But he believes it accelerates a positive trend toward more saving and less borrowing. The U.S. personal savings rate, which has lagged our industrial competitors, should improve, providing a welcome pool of capital for an entrepreneurial economy as well as the enormous federal debt.
From the point of view of Hirschhorn`s employer, a major mutual fund sponsor, the numbers are bullish: With declining interest rates resulting from less demand for debt, people will put their savings into stocks and bonds.
Hirschhorn`s analysis deals with the supply of capital. What about the demand for capital and the return on capital?
For years, American business has been riding the gravy train of consumer spending and consumer borrowing. Rising prices fueled by consumer demand have masked many management failures. Current economic statistics suggest the train is slowing rapidly. Consumers are postponing big purchases and looking hard for bargains.
With their big-time job cuts, companies like to say they`re getting lean and mean. But consumers are getting leaner and meaner.
Computer chips and personal computers, once considered the ultimate products of America`s premium-priced ”knowledge industry,” have become routine commodities, where the only thing that matters is low price. Consumers know how to force price cuts for many items just by waiting to buy.
It remains to be seen how American business will adjust to a non-inflationary economy or whether Washington will continue to provide a non-inflationary economy. Business executives and politicians, who often claim to be at odds, can see benefits for themselves in inflation.
In addition, the current scary economic climate makes many people risk-averse in planning their careers. The picture of thousands of budding entrepreneurs throwing off the shackles of corporate bureaucracy to strike out on their own isn`t quite so clear these days.
More common is the picture of the hapless middle manager thrown out on the street without family health insurance who is forced to take a job at half his or her former salary. Baby Boomers Bill Clinton and Al Gore won`t hesitate to put that picture in every home in America through an aggressive TV campaign against George Bush.
This is not an image that will inspire the best and brightest of America`s young people-children of the Boomers-to take risks. Who among them will have the courage to invent and commercialize the globally competitive, premium products and services of tomorrow?
Useful data on what has happened to the vanishing ranks of corporate middle managers isn`t in yet. But they can`t all be consultants to each other. Someday, corporations may start to hire back aging Baby Boomers when faced with the shrinking supply of literate young people. But big companies don`t want the big liabilities that come with taking on older people and their health problems.
What is the outlook for stocks and bonds if American business can`t grow profitably in a non-inflationary economy and America`s most productive workers are cowering in low-paying, trivial jobs? Not good. The pressure on politicians to inflate the economy will be tremendous.
