Morningstar Magazine - February/March 2014 - (Page 23)

in births and faster growth in deaths as the population ages. Immigration has fallen as well. The U.S. Census Bureau estimates that the population growth rate will increase slightly for the rest of this decade before beginning a multi-decade decline to a 0.5% growth rate by the middle of the century. And even that depends on a sharply higher immigration rate. Exhibit 1 Robert Johnson's U.S. Economic Forecast for 2014 2011 2012 2013E 2014E GDP (%) 2 2 2.3 2-2.5 Inflation (%) 3 1.8 1.3 1.5-1.8 Total population growth is a very blunt instrument, while a more carefully constructed age-based growth model could provide even more clues to future economic growth. Unfortunately, that is not good news for the decades ahead, as aging populations with large numbers of retirees don't generally grow as fast as countries with a younger population. All of this is just a very long way of saying that recently, slower economic growth rates are consistent with a slower-growing, aging population. Those expecting a return to 3% to 4% GDP growth could be waiting for a very long time indeed. Very Few Equity Bargains Our equity-analyst teams report that they are not finding a lot of bargains. Overall valuations show the stock market is just a little above fair 202,000 189,000 190,000 190,000 Unemployment (%) 8.5 7.8 7.1 6.2-6.5 10-Year Treasury (%) Higher population growth rates have generally been associated with higher GDP growth rates. However, when population growth began to slow in the 1970s, it didn't affect consumption immediately for several reasons. First, consumption in the 1970s and 1980s was supported by sources other than income as the gap between spending and income widened. More borrowing or the spending down of assets accounted for some of that and helped consumption stay higher than one might have expected. More women entering the workforce (more income per household) also probably helped push incomes and consumption, even in the face of slower population growth. Finally, the 1970s and 1980s benefited from baby boomers moving into their prime spending and income years. Employment Growth (monthly average) 1.9 1.8 2.9 3.5-4 Auto Sales (millions) 12.8 14.5 15.7 16-16.5 624.0 830.0 925.0 1,050-1,100 4.3 4.7 5.1 5.1 Housing Starts (thousands) Existing Home Sales (millions) Source of Historical Data: St. Louis Federal Reserve Exhibit 2 Recovery Growth Rates Year-Over-Year Average First 4.25 Years of Recovery Recovey Beginning... Consumption Growth Income Growth Beginning Population Growth 1949 4.1 5.1 NA 1954 4.8 4.6 1.8 1958 3.7 3 1.7 1961 4.5 4.9 1.6 1970 4.7 5 1.3 1975 4.5 3.5 1 1982 4.9 4.1 0.9 1991 2.8 2.5 1.3 2001 3.1 2.9 1 2009 1.6 1.3 0.8 Average 3.9 3.7 1.3 Sources: BEA, Census Bureau, and Morningstar calculations. value, but not by a lot. There's certainly no bubble. However, our technology team warns of greed and meaningful downside risk in the Internet sector. Manufacturing appears to be picking up for real, and our reports show an increase in both spin-outs and acquisitions. Activity in the telecom sector was particularly strong. Perhaps the most notable thing I found in our quarterly equity outlooks was a sizable increase in U.S. oil production, which indicates that we are all still underestimating the positive ramifications of the new U.S. oil boom. The ongoing battle between coal, natural gas, and regulators is an issue. Our utilities team noted many coal plant closures, our industrials team noted weak mining machine activity, and our rail group noted poor (but improving) coal shipments. I am also reminded that all the cheap natural gas is not without real human and economic consequences in the struggling Appalachian coal country. K Robert Johnson, CFA, is director of economic analysis with Morningstar. global.morningstar.com/Morningstarmagazine 23 http://global.morningstar.com/Morningstarmagazine

Table of Contents for the Digital Edition of Morningstar Magazine - February/March 2014

Morningstar Magazine - February/March 2014
Contents
Contributors
Letter From the Editor
Preparing for the Next 50 Years
Morningstar Managers of the Year
Fixing the Trust Deficit
Rethinking the Path to Retirement
Trends
Same Old, Same Old
Global Briefs
The Economic Implications of an Older World
Banking on Performance
Is the Affordable Care Act Healing Health Care’s Woes?70
Baxter Has a Positive Prognosis
Leading Fidelity’s Charge for RIAs
Our Favorite Mutual Funds
50 Most-Popular Equity ETFs
Undervalued Stocks With Wide Moats
Moving the Goal Post

Morningstar Magazine - February/March 2014