Demographics is Best Leading Economic Indicators of Future Trends. Harry gives advice on what to do now.
The Dent Method: Economic forecasting based on changes in demographic trends
What is it? Why use it?
The Dent Method - a long term economic forecasting tool based on demographic trends – is used by Financial Advisors and individual investors to help predict with uncanny accuracy the health of the economy as well as the stock markets years and decades in advance by identifying long-term trends that help build an overall financial picture.
As the only documented record of success at forecasting long term economic trends, The Dent Method has consistently proven that the age structure of the population has the power to influence consumption demand in a predictable, substantial and consistent manner.
Developed by economic expert Harry S. Dent, Jr. in the late 1980’s, The Dent Method offers a unique view of economic forecasting because it suggests that demographics and spending trends affect our economy, stock prices, inflation, interest rates, innovation cycles, new technologies, product and industry trends, real estate, immigration and domestic migration, and new business models for management and organization. This method also shows how to recognize and potentially profit from economic cycles, as well as helps pinpoint the best careers in growth industries, the best places to live, the hottest potential investment sectors, and the key technologies that will change everyday lives.
The Dent Method can be explained by studying:
Predictable Spending Patterns at Different Ages and Stages of Life
In a modern and industrialized economy, as we age we go through very predictable spending stages of life that occur at predictable ages.
Chart 1:1 indicates that as we age we usually earn more income. We spend more up until our average peak spending age of 47. Between about 18-47 we go through several stages of life. From just entering the workforce at 18-22 years of age, to getting married between 22-30 and then starting a family, to purchasing our first home from about ages 31-42 - the stage at which we incur the most debt – and our spending continues to increase until about age 47 as our kids reach their late teenage years and are still living in the household. As we reach 50 and the kids leave home, we begin to spend less, paying down debts, and start saving for retirement. We don’t make less, we just spend less.
Even through natural and economic disasters, terrorism and even war, shown below, our spending trends don’t seem to change. Consider the following events we have witnessed in the last 20 years:
- 1987 – Black Monday, stock market plunges over 20% in one day
- 1990 – First Gulf War
- 1990-91– Recession
- 1997 –Asian currency meltdown
- 1998 - Long Term Capital Management hedge funds blew up, ensuing credit crunch
- 1999 - 2000 – Tech bubble and bust
- 2001 – 9/11
- 2002 - War in Afghanistan
- 2003 – Iraq War
- 2005 – Hurricane Katrina
- 2005 – Oil Rose to $75 a barrel
- 2007 – Sub Prime Meltdown, oil over $90 a barrel
How do we go through these incredible obstacles and yet spend more? These disasters and threats are not what we base our spending decisions on.
The age and stage of life determine spending patterns. As we move through predictable stages of life, which correspond with different ages, we change our spending in very predictable ways. What we buy at each stage is predictable and consistent. This information can be used to forecast how spending will change in the years and decades to come.
Who Spends What in the Economy and Its Demographic Impact
Personal consumption, or what people do as consumers, represents about 70% of the Gross Domestic Product. Why is this important? It means that how people as consumers spend money is the largest influence on our economic health. As larger groups of consumers age and spend more, the economy grows. When large groups in the population pass their peak stage in spending, this leads to less spenders and slows down the economy.
The Basis of All HS Dent Research and Forecasts: The Consumer Expenditure Survey
The Consumer Expenditure survey has been conducted annually by the US government since 1984. This survey asks 5000 respondents to list all income and expenditures out of their personal budgets for a period of 6 weeks. From sodas, movies, and mortgage payments to car, pizza, and insurance - literally anything paid out of the household is recorded. Respondents are then asked demographic questions such age, education, number of children, and where they live. From this body of research we learn a tremendous amount about average spenders and what they’re doing. We can then take this data to see how we spend money at different ages and on what products and services.
Let’s take potato chips:
The demand is the highest at age 42. It’s not like there are a bunch of 42 year olds eating potato chips. We’re buying the chips for our children. When the parent is 42, the average aged kid by then is 14.
The demand for Healthcare is the highest after 50. It begins to creep up from early 30-s to 40’s but begins to take a dramatic rise after 50.
People represent about 70% of the Gross Domestic Product and represent the largest influence on our economic health. As larger groups of consumers age and spend more, the economy grows. When large groups in the population pass their peak stage in spending, the economy slows down.
Birth Rate and the Immigration Adjusted Birth Index
New generations come along about every 40 years. As they age, they move through predictable earning, spending and productivity cycles. The peaks and troughs of these cycles can be forecasted by moving forward the birth index (which we adjust for the births of all past and future projected immigrants) by the appropriate number of years.
The Dent Method reveals that economic boom and bust times are determined by demographic factors. Individual spending tends to peak in the mid-forties. Thus, aggregate spending should correlate with the size of the mid-forties population. If we plot the estimated size of the mid-forties age cohort with the projected year, we obtain a generally rising trend that shows a number of peaks and troughs due to past variations in birth and immigration rates. For example fewer babies were born during the Great Depression than either before or afterward. Thus, we would expect that 45 years later (during the 1970’s and early 1980’s) there would be a corresponding drop in the number of middle age people. Economic boom times are associated with an increasing size of the mid-forties population and bust times are associated with a decreasing size of this population. The oscillation in the number of middle-agers at their peak-spending years is called the spending wave.
Economic boom times are associated with increasing size of the mid-forties population and bust times are associated with a decreasing size of this population.
The Spending Wave
The Spending Wave predicts the health of our economy by moving forward the birth index 47.5 years. Why this number? That’s average age at which consumers reach their predictable peak in spending. By our mid-forties, the average American family has purchased the largest home we’ll own and all the furnishings to go with it, and we spend money on clothing, food and education for our teenage children. Once the children leave the nest, the fixed costs remain the same but variable costs suddenly start dropping. Though this frees capital for discretionary spending, it marks the end of the necessary family spending that drives the economy.
The essence of the Spending Wave is simple: Predictable spending patterns drive the economy.
The Spending Wave chart shown here illustrates the close correlation between the birth index, moved forward 47.5 years, and the Dow adjusted for inflation. As you can see, the Spending Wave allows us to see when the stock market will grow and decline almost five decades in advance. Equities, especially large company stocks, are the place to be when increasing numbers of a generation are moving to their peak spending years.
The Spending Wave provides a five-decade window on stock market trends.
The baby boom Spending Wave started in late 1982 and should continue until about mid-2009. It is the unusually large size of this generation that is causing the stock market to perform even better than it has in past boom periods, such as 1942 to 1968, when the Bob Hope generation was moving into its peak spending years. In that boom the Dow averaged 11% annual growth rates. In this boom it is averaging 17%, which is why valuations or P/E (Price to Earnings) ratios are higher.
As shown in the Spending Wave Chart 4:1 when more spenders are at their peak in spending they are driving economic growth. Economic growth drives company earnings, which eventually is recognized in the stock market. It’s not an exact fit. The stock market includes a lot of psychology and short term volatility, but over the long term these trends move together. As indicated we’re nearing the point after ‘08 or ‘09 when our economy should begin to slow down.
Our Free Global Demographic Trends Database (click here) allows you to see Spending Wave trends and other key economic statistics for countries around the world.
The Inflation Indicator
Inflation is Largely Driven by Demographics, Not Monetary Policy
Economists think that inflation is largely a monetary phenomenon – more money chasing fewer goods. But this doesn’t really make sense intuitively. If we doubled the money supply, then apples would cost twice as much, but we would have twice the dollars and we wouldn’t feel poorer. Inflation only causes real pain when prices rise faster than incomes and reduce our standard of living.
In reality, inflation is the economy’s means of financing not only the new, young generations that will become highly productive in the future, but also the new technologies these new generations bring.
Since the 1960s rising workforce entry by the baby boom caused rising inflation rates. But after 1980 we have seen falling and low inflation as these new workers and their new technologies have increased productivity rates. But the rising entry of the echo boom will cause inflation to rise modestly from 2004 into 2010. After that inflation falls because the larger baby boom will start to retire and offset the workforce growth of the younger generation and the economy will be slowing because of the Spending Wave.
HS Dent’s team of economic researchers utilizes true independent research on demographics studies to give Financial Advisors and Individual Investors the tools to help forecast current and future business, technology development and careers as well as current business, finances, careers and real estate.
For more information on HS Dent, please contact us or call 1-888-307-3368.