Households: Who are They?

Introduction

At the center of the economic system are people.  To understand the historical workings of any of the markets, or to forecast developments in the markets, we must understand important demographic changes. Population is one of two key driving forces in an economy (technology is the other). Population growth provides workers for the nation's offices and factories and buyers for the goods and services produced in those offices and factories.  In this section we will attempt to develop a "statistical" profile of the people by examining the size, growth, age, race and ethnic distributions of the population as well as its regional and urban-rural mix. 

The primary keeper of demographic data is the US Census Bureau which has an extensive web site that includes a site devoted to population topics.  At this site you will be able to find current local, state, and national population estimates.   You can also find projections of the population including national and state projections disaggregated by age and ethnic and racial background.

Population Size and Growth

Let us begin at the beginning, with the size of the US population. The population of the US in 1998 was just above 270 million, making it the third largest country in the world and home to approximately 5 percent of the world's people. Only China and India, with 1.255 billion and 976 million people, are bigger.   [For the most recent UN world population figures you can go to the UN site and select the Databases page and follow to the Social Indicators page and then to the Population page]. 

World Population Estimates
(millions)

As for growth, in the late 1990s the US was growing at an average yearly rate of about .8 percent, faster than most of the developed world, but substantially slower than the less developed world. In the second column of the table above are estimates of the population in 2010 based on the admittedly simplistic assumption that future growth will equal current growth. Under these assumptions, the ranking of the world's largest countries will change substantially. Falling out of the top 15 (1980 ranking) will be the high income countries Germany, France, Italy, and the UK.  They will be replaced by the low income countries Iran, Vietnam, Egypt, and the Philippines. Stated somewhat differently, poorer, less developed countries will account for 95 percent of the population increase of the world's 20 largest nations between 1990 and 2010.

The differential in the growth rates can be seen in the table below that contains the same data sorted by population growth rates.  Here we see the fastest population growth rates tend to be in Africa and the Middle East while the slowest tend to be in Eastern Europe where the population is actually declining.  

World Population Growth Rates
(millions)

What explains the differential rates of population growth? To understand the differentials in the rate of growth, it is best to recognize there are three separate influences on population size: births, death, and net immigration. A nation's population will grow more rapidly because there are more births, fewer deaths, or there are more immigrants entering the country. At the present time, the statistics on international migration are quite limited, but we do have data produced by the US Bureau of the Census on birth, death, infant mortality, and total fertility rates. Some of these data can also be found on-line at the same UN Social Indicators site under health data. 

The table below contains the demographic statistics for a small sample of countries selected to provide the upper and lower boundaries for these statistics. The US has a birth rate above that in most of the world's industrialized countries and the newly industrialized countries (NICs) of South East Asia, while its death and infant mortality rates are above those in a number of Middle East countries including Syria and Iraq, East Asian nations, the industrialized countries, and the NICs. The result for the US is a total fertility rate above, and a life expectancy significantly below, the rates of other industrialized countries.

International Demographic Data

It is unlikely, however, that the growth rate in the US or any of the other nation's will remain constant.  Population in the US continued to expand in the 1980s, by 22.2 million, but it did so at a decreasing rate. The growth of the population, which stood at 33 percent at the turn of the 19th century and 22 percent at the turn of the 20th century, threatens to fall below 8 percent as we enter the 21st century.

In addition to the secular decline, there have also been some notable variations around that downward trend. There were the exceptionally sharp declines in the 1860s and the 1930s, declines associated with the Civil War and the Great Depression.  After bottoming-out in the Great Depression of the 1930s, the birth rate rose slightly through the mid 1940s and then increased sharply in the late 1940s, ushering in the "Baby Boom Generation." These 'boomers' are those individuals born between the late 1940s and the early 1960s, a generation bracketed by the end of WW II and the beginning of the Vietnam War. At the close of the 21st century the leading edge of the boomers reached 50 and became eligible to join the AARP.

A better picture of the baby boom generation can be found in the time-series graph of birth rates. The boomers represent the 'bulge' in the graph below. During the 1950s and 1960s, as the birth rate peaked, population growth reversed its century long pattern of decline. Since the early 1960s, however, population growth in the US has followed the birth rate and resumed its downward trend, although there has been a modest reversal in the birth rate since the late 1970s, the baby boomers 'echo'. The population growth rate, that had peaked in the 1950s at 18.5 percent, fell to less than 10 percent in the 1980s.

Age Distribution

The population of the US is also aging. Some indication of the impact of these baby boomers on the age distribution of the population is provided in the graph below. The aging of the baby boom can be seen in the movement to the right of the peak in the population distribution graph. It should be obvious why these boomers have been a favorite generation of marketers, why they continue to have an impact on the economy, and why you are listening to 60s music on the radio.  In the 1950s we were building homes for the boomers' parents to house the new babies.  Then we built schools for the boomers - first grade schools and high schools, then colleges and universities.  And when they left school, we built apartments, houses, and something new, condos, for them to live in.  As the baby boom aged, the largest cohort passed from the 5-14 year age bracket in 1960 to the 24-35 age bracket in 1990. You may also note the aging of the baby boomers in your own communities as you drive by the grade schools that housed the 1950s children that were converted to elderly housing, although some may have been reactivated in the late 1990s to educate the boomers' children.  As we look forward, it is nearly impossible to ignore the boomers when making any long-term economic forecast.  At the top of the list of 'effects' of the aging of the boomers would have to be the forecasts of falling home prices and the insolvency of social security.

The aging of the population reflected in the higher right-side tail of the age distribution graph can also be traced to increasing life expectancies. People are living longer today and the National Center for Health Statistics expects the trend to continue into the future.  In 1940, when the social security system was taking form, life expectancies at birth for males and females were 60.3 and 65.2, sharply lower than the current figures of 72.1 and 79, and the projections of 74.4 and 81.3 for the year 2010. Looked at somewhat differently, in 1940 a 20 year old male could be expected to live only 2.8 years beyond retirement at age 65, while in 1990 he could be expected to live nearly 8 years beyond retirement at age 65. Life expectancies of females have followed the same pattern and remain substantially higher than those of males.

Offsetting the effects of the aging of the baby-boomers and longer life expectancies on the age distribution, has been the growth in immigration. Immigrants tend to be younger than the resident population, and in the US we have witnessed a substantial increase in immigration in the 1990s. In the years of 'peace' since Vietnam, political and economic upheavals worldwide have created a massive movement of people across international borders, a process that has been accelerated by the restructuring of Eastern Europe.  And the US has been a favorite destination.  Since the end of W.W.II, the number of individuals moving into the U.S. has risen steadily so that by the 1980s, the number of immigrants into the U.S. was approaching the record highs recorded in the beginning of the century. In 1990, more than 1.5 million legal immigrants were admitted to the US.

The composition of the immigrants has also changed substantially in recent years. In the 1960s, nearly 40 percent of the immigrants to the US originated in Europe, but by the 1980s Europe's share had fallen to 10 percent while Mexico and Asia accounted for nearly 80 percent of the immigrants. It is therefore not surprising that the increasing numbers and changing composition of new arrivals has brought with it renewed calls for restriction on immigration in the US. We witnessed much the same phenomenon during the last great immigration surge as the origin of the majority of immigrants shifted from northern and western Europe to southern and eastern Europe. The backlash against immigrants was not constrained to the US with Europe experiencing its share of  'skin heads' attacks that gained notoriety in Germany in 1993.

The net effect of the longer life expectancies, lower birth rates, and higher immigration has been a dramatic increase in the size of the elderly population. In the past twenty years the elderly population has been growing approximately 170 percent faster than the total population.  By 1990, nearly one of every eight individuals in the US was over 65, up from one of twelve in 1950.  And the elderly are getting older. In the two decades ending in 1990, the population over 75 grew two-thirds faster than the population aged 65-74. Between 1990 and 2010 the number of very old are projected expand 130 percent faster than the not-so-very old so that by 2010, 13 percent of the population will be over 65 with 60 percent of these being over 75.

Age Composition of the Population
(%)

Source: Statistical Abstract of the United States: 1993

And if you are troubled by that, wait till you see what happens in the decade ending in 2020, as the leading edge of the baby boomers approaches today's normal retirement age. According to the Bureau of Census projections, after slowing in the 1990s, the growth rate of the elderly will skyrocket, reaching 75 percent. By 2020, more than one of every five people in the US will be over age 65 and nearly one of every ten will be over 75.

The obvious problem then will be, who will be working to pay the taxes for the retirement checks? It would appear there may not be enough people, at least if we are to maintain the current system.

Household Formation

An often overlooked, but important demographic event has been the divergence between the growth rates of the population and the number of households. After the 1950s, a decade of nearly equal rates of household formation and population growth, household formations began to outdistance population growth. The divergence peaked in the 1970s when, as a result of the movement of the baby boomers into their 20s, declining rates of marriage, later ages at first marriage, rising divorce rates, and increasing wealth of the elderly, households were expanding more than twice as fast as the population and non family households were expanding nearly 500 percent faster. By the 1980s, however, the differentials had fallen to about 50 percent and by the 1990s the differential had virtually disappeared.   This is one of the places you might look to explain the growth of the market for condominiums that surfaced in the 1970s. 

Regional, Racial and Ethnic Population Redistribution

In recent years there has been a substantial change in the composition of the population. As the graph of regional population shares indicates, the Northeast, which in 1790 accounted for nearly one half of the nation's population, has seen its share of the population fall as a result of slower than average population growth. This movement was only temporarily slowed around the turn of this century as a result of massive immigration, mostly through the port of New York, that accompanied the rapid industrialization and urbanization of the U.S.

Following W.W.II, the share of the nation's population living in the Northeast and Midwest resumed its fall. Between 1950 and 1990, the Northeast's share of the nation's population fell by nearly 20% while the share living in the West increased by more than 40%.  For the period 1950-1990 there were two focal points in this growth, Florida in the Southeast and California, Arizona, and Nevada in the Southwest.

This spatial pattern of growth can be attributed to three separate phenomena. First, there was the migration of individuals out from the Northeast and Midwest toward the South and West.  In the 1980s, net out migration from the Northeast and Midwest averaged approximately 420,000 a year. Second, there is the aging of the population which helped fuel the growth in Florida, a state where in 1991 approximately one of every 6 individuals was older than 65. The final factor was the changing geographic profile of immigrants to the U.S. As indicated earlier, increasingly immigrants are being drawn from Mexico and Asia and these immigrants tend to favor California and the Southwest.  In 1989, 41 percent of immigrants admitted to the US designated California as their intended state of residence, nearly 3.5 times the number headed toward the second most popular destination, New York. In large part this can be attributed to the fact that nearly 41 percent of the Asians and 60 percent of the Mexicans were headed for California.

Also evident in this time period has been a change in the racial and ethnic composition of the population. As a result of differential birth rates and immigration rates, the population of the US has become less White and more Hispanic, a trend that is expected to continue over the foreseeable future. In 1990, approximately 8.2 percent of the US population was Hispanic and 10.5 percent was Black, and according to government projections, by the year 2010 these shares will rise to 10.5 and 12.5 percent.   It was no accident that in the 1998 elections you were seeing a number of stories concerning the "discovery" of the Hispanic vote.

There is no question that demographics matter and in this section we have seen how in recent years there have been some substantial changes in the demographic landscape - changes that will continue - and any decent analysis of a market should account for these changes.  It should also move beyond the qualitative to the quantitative, and the first step in this direction will be the discussion of elasticity in the next section.