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By Robert Johnson, CFA | 03-12-2014 04:00 PM

Morningstar Minute: Slowing Population Growth Bad for GDP

U.S. gross domestic product won't hit booming levels anytime soon as the country's population growth remains low.

The Morningstar Minute is our quick take on investments, the market, economic indicators, and more. Join us every day for fresh insights from our analyst team.

Bob Johnson: Today we're going to take a look at a graph that plots population growth against GDP growth, gross domestic product, the biggest measure of U.S. economic activity. This graph plots a five-year average of the population growth and of the GDP growth, and we lag the GDP growth about five years behind the population growth.

Population growth usually moves first, and so you can get some clues about what's going to be happening in the future by looking at the population growth today. And unfortunately, the news there is not wonderful. Population growth used to be as high as 1.8% in the 1950s. Now that population growth rate has dropped down to as low as 0.7%. So, we really had a pretty dramatic slowing, and as the graph shows, GDP has slowed down over that same time frame that population has slowed down. And when we have upward movements, even temporary, in the population growth, the GDP does a little bit better. There is just a little bit of gap between the two lines because there is such a thing as productivity and efficiency, so that you will tend to grow the GDP a little bit faster than population growth, but they're very, very closely tied together.

As I look forward at the data, I'm a little bit scared about it. What it seems to indicate, as we have 0.7% growth rate now in population, maybe the Census is predicting it could go as low as 0.5%, we're going to have continued slow GDP growth. People who are expecting a rapid rebound to something that looks more like a 4% GDP growth are probably wrong, and it is probably going to be something more like we're seeing right now, the standard 2%, as population growth remains low.

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