SEATTLE -- Demographic trends in the United States may foretell lower long-term interest rates in coming years, the senior U.S. economist at Donaldson, Lufkin & Jenrette told municipal analysts yesterday.
The nation faces "an enormous demographic drag" that has important implications for items such as housing starts and inflation, economist Richard F. Hokenson said here at the opening session of the 10th annual conference of the National Federation of Municipal Analysts. Over 100 analysts attended the meeting.
Hokenson said the growth rate in the U.S. labor force has been a major factor relating to nominal gross domestic product, which in turn has moved roughly in tandem with the yields on long-term Treasury bonds.
Contractions in labor have often been a "disinflationary force," Hokenson said, so current demographic developments in the United States suggest "the trend is down" for interest rates.
Since the bond market "eventually mimics the underlying economic structure," long-term Treasury yields could drift into the "low fives" by 1995 if past demographic links with the economy are a good predictor, he said.
Hokenson, who said he hoped to provoke thought with his approach, developed much of his thesis by focusing on population trends of 25-year-old people in various countries.
In developed countries particularly, "this is the first time ever that we have seen" such declines of those 25 and younger, Hokenson said.
The 25-year-old category is especially instructive because average consumer expenditures show some of the fastest growth in that category, he said.
But the fact that growth in this age group has tailed off could be one major reason "why recessions in developed countries are lasting so long," he said. The countries are not benefiting as much from the pent-up spending demand of younger consumers, he said.
Unlike in some other countries, this age group in the United States is expected to resume growing later this year and continue through 1996, which could produce an economic "spike," Hokenson said.
But the numbers are expected to decline again after 1996, when Hokenson said the U.S. could encounter "a short-term situation like 1973, when there was a very nasty consumer recession."
Based on demographics in the United States, Hokenson said the upcoming period is similar to trends in the 1950s.
That period is generally not seen "as a sour time" for the economy, and it may be "the world we have the best opportunity of recreating" in terms of economic trends, he said.
The potential for lower interest rates also "has important implications" for many states and localities, especially because their assumptions regarding investment returns to fund retirement systems may anticipate a higher interest-rate environment, Hokenson said.
William W. Fish, senior vice president and manager of Donaldson Lufkin's municipal research group, provided a chart showing certain public retirement systems which have unfunded liabilities and also in some instances have "aggressive" assumptions about investment return.
Systems with heavy weightings in fixed-income instruments could find it most difficult to achieve assumed returns, especially if interest rates are in a downward trend, Fish observed.
Fish also provided a state-by-state analysis of demographic trends by age. Examining data for groups such as elderly populations could "be useful in forecasting state Medicaid expenditures" and the spending requirements, Fish said. Some of the nation's southern states, which possess more temperate climates, are showing "well-above average" growth rates in elderly groups, Fish noted.
Hokenson and Fish also touched briefly on the North America Free Trade Agreement. Given demographic trends, Hokenson observed that Mexico could be a critically important "market for America's long-run excess production."
A separate panel yesterday also discussed some of the broader implications of the proposed trade agreement.
Based on current export patterns, Texas stands to capture many of the benefits from the agreement, followed by California, Michigan, Illinois, Arizona, and New York, said John Hallacy, first vice president and manager of municipal credit research at Merrill Lynch Capital Markets.
Overall, Hallacy said the agreement "does not lead to a zero-sum game" because he believes both the U.S. and Mexican economies would "gain over time."
Katherine Bateman, president of the analysts group and an assistant vice president of John Nuveen & Co., opened the conference yesterday with a summary of the group's changes over the last 10 years.
She noted that the federation is adding a mailing address and phone number in Washington D.C. "Hopefully we'll be more easily found in the future," because many people turn to that city for information, Bateman said.