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How to Invest in Light of a Shrinking U.S. Workforce

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Demographic changes in the U.S. are coming down the pipeline fast, and they're turning historical norms about economics on their head. For example, a long-held belief that the economy needs to create around 150,000 jobs just to maintain a stable unemployment rate flies in the face of recent experience, as the unemployment rate has dropped despite weak new-job figures. And despite low single-digit GDP growth, corporate profits are rising. So what's going on, and how does it affect our investments?

The reason you can throw old expectations for employment and economic growth out the window is simple: We have a rapidly aging population. In fact, we probably don't need to add many jobs to the workforce to lower unemployment these days, something that has an impact on unemployment benefits, entitlements, GDP growth, and the growth of U.S. firms. Below I've highlighted the trend toward retiring workers and what you should watch for in your investments.

We're losing workers faster than we can replace them
Some see a declining labor participation rate as a sign that workers are discouraged, but I point to this as the biggest sign that older workers are retiring and simply leaving the workforce. We're adding young people to replace the older ones who are retiring at the rate we have since World War II, and we may be starting to head backward.

In 2000, there were 40.7 million people ages 10 to 19 ready to replace 24.3 million people ages 55 to 64 who would presumably reach retirement age over the next decade. That's a 167% replacement rate for retirees.

By 2010, there were 42.7 million people ages 10 to 19 who could replace 36.5 million people ages 55 to 64, a 117% replacement rate. As you can see, the number of workers reaching retirement age is exploding. If we look out another 10 years, the younger population will be too small to replace retirement age workers. It's no wonder that our labor participation rate is down and people are leaving the workforce. They're retiring!

This demographic shift has a huge impact on things like the cost of social programs, but it also means that GDP growth will slow, and so will the number of jobs created each month -- even if the unemployment rate goes down. In the past, it has been this growing number of workers that has helped grow GDP, but that trend won't continue.

The impact of an aging population doesn't just impact the government's tax receipts and spending. It also impacts companies.

What it means for your investments
In light of these trends, I'm looking at three things in my portfolio. First, I'm keeping an eye on international exposure for growth instead of looking domestically, especially in diversified companies. Here are three companies pushing internationally for growth.

  • 3M (NYSE: MMM  ) grew into an international power on the back of the growing U.S. economy in the last century but it has turned its gaze overseas for growth. The company generated 66.1% of sales internationally last year, giving exposure to many strong emerging markets.
  • Gambling is growing worldwide and Las Vegas Sands (NYSE: LVS  ) has exposure to two of the fastest growing markets -- Macau and Singapore. For an even more leveraged play, Melco Crown (Nasdaq: MPEL  ) gets 100% of its revenue from Macau.
  • Apple (Nasdaq: AAPL  ) has been growing quickly in the U.S., but it's China that has provided some of the company's most recent growth avenues. The company's sales in China, Hong Kong, and Taiwan tripled in the first quarter and may double in 2012.

Valuation multiples of companies with exposure to Asia and Latin America should also outpace those of companies focused domestically. So when you think a U.S. company that has historically traded for a 20 P/E looks cheap at a 15 multiple, there may be reason to think again if growth will slow in the U.S. market.

Second, I watch for demographic risks like pension obligations that can sink a company. General Motors was forced to go through bankruptcy largely because pensions and medical costs for retiring workers were exploding. Ford (NYSE: F  ) is trying to shed liabilities by offering a pension buyout to retirees and former workers. The few companies that still have pensions, including General Electric (NYSE: GE  ) , Boeing, and 3M, are subject to growing liabilities and may be forced to make sizable contributions to keep up with retiring workers. As workforces age and growth slows in the U.S., these liabilities have become a huge problem, and it's likely to persist.

Third, I think real estate may be in for a tough run. Those hoping for a strong recovery in housing and commercial real estate may be in for a long slog for the next two decades. If the workforce shrinks, there should be less need for commercial real estate, putting pressure on a market that was predicted to go bust a few years ago.

In housing, the number of households will eventually stop growing as retired workers move to nursing homes, in with family, and pass on. Growth in the workforce combined with a growing number of two-income families helped drive housing higher through the 2000s, but the trends are reversing, and housing will be in for a long run. Combine demographic changes with rising interest rates, and I wouldn't be surprised if housing prices don't go anywhere for another decade.

Foolish bottom line
There are a lot of trends that investors need to keep an eye on and demographic changes in the U.S. may have a bigger impact on your portfolio than you think. I expect slow growth and a shrinking workforce to have a big impact on how and where companies invest in the future. Asia and Latin America should be looked to for growth instead of the U.S., and keep an eye on risks like pensions and housing that will be affected by an aging workforce.

All is not lost in the U.S. despite these trends. Our team of analysts has identified a technology up-and-comer that will turn "Made in China" on its head. Find out which stocks will benefit in our free report, "The Future Is Made in America."

Fool contributor Travis Hoium does not have a position in any company mentioned. You can follow Travis on Twitter at @FlushDrawFool, check out his personal stock holdings or follow his CAPS picks at TMFFlushDraw.

The Motley Fool owns shares of Ford and Apple. Motley Fool newsletter services have recommended buying shares of Ford, Apple, and General Motors, as well as creating a bull call spread position in Apple and a synthetic long position in Ford. 

The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.

Read/Post Comments (5) | Recommend This Article (9)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On May 22, 2012, at 6:06 PM, cp757 wrote:

    Travis I agree with you that Las Vegas Sands ,Apple, and Boeing's are a must in any portfolio and I think in 5 years we will see the importance of what you are pointing out. I was wondering what you thought all these young workers should do about the Taxes and Health Care they will have to pay for. The old will get the Social Security checks that the young are paying for. Then you have the young Americans that get to pay back the 16 trillion in debt. I think your right they will never be able to buy a house. I wonder how much of that 16 trillion found its way into those corporate profits that you mentioned. It sounds like the US investments are going to have some problems and that's what you are pointing out. I guess that's why Eduardo Saverin with Facebook renounced his U.S. citizenship and moved to Singapore.

  • Report this Comment On May 23, 2012, at 10:40 AM, moneytrail wrote:

    Brilliant analysis Travis: the US economy is in the tank because baby boomers are retiring -- not because of $5.5 TRILLION in new debt being created since '08; not because of Obama's onslaught against business, investment and success; not because of Obamacare’s unconstitutional mandate that is destroying our health care system, causing health care costs to soar and forcing tens of thousands of doctors to retire; not because of an energy policy that has reduced drilling on Federal Lands by more than 33%; not because the gang in the White House keeps pumping up the "victim industry” by encouraging Takers and Beggars to grab what they can in food stamps, unemployment benefits and “disability” payments taken from wealth creators because finding a job is not fulfilling, etc., etc., etc.

    This may be the dumbest analysis of the US economy’s decline since Housel declared that the jobs market turned a corner in March. Where do the Fools at Motley find you guys – at the DNC?

  • Report this Comment On May 23, 2012, at 2:55 PM, TMFFlushDraw wrote:

    The economy isn't tanking. One of my points in this article was that in light of the declining workforce our recovery is pretty remarkable. Previous recoveries have been boosted by a growing workforce so we're fighting headwinds.

    If you're unhappy about spending then take a look at Europe to see what happens when you slash spending in the middle of a recession.

    As for your comments about Obama I'd be happy to answer comments about specific policies but hyperbole like "Obama's onslaught against business" is too general to answer. Judging by corporate profits and stock market performance under Obama I'm not sure where exactly the onslaught is?

    In energy, we're importing less oil than we have since 1995 and production of both oil and natural gas are up dramatically since 2008. Not sure what you want to happen but I think that's good for the U.S.

    Travis Hoium

  • Report this Comment On May 23, 2012, at 6:43 PM, moneytrail wrote:

    Wow! You really are clueless about economics and business dynamics. Sounds like BO is your man and his socialist, wasteful government policies is your religion.

    So let's see: Greece, Spain, Italy, France, Portugal and Ireland, appropriately called the PIIGS, should increase wasteful, government spending. Hey, sounds like BO's plan -- let's take from the wealth and job creators and give it to the beggars and takers among us, by first runnig it through the government and public employee unions so they can suck up the wealth created by others, and pass on the crumbs to the truly needy among us.

    Unless you've been living under a rock BO's war on profitable businesses is well documented. Open your eyes.

    The primary reason we are importing less hydrocarbons is becasue of fracking on private land, which BO's EPA is trying to squash and the slowest economic recovery going back to FDR. (Ghee, there's a coincidence.) Our improved hydrocarbon status is occurring despite, not becasue of BO.

    Please better inform yourself about ecomonics and business matters before your next attempt at business analysis; or, get a job on BO's re-election campaign so he can complete the job of destroying America's dynamic economy, with four more years of divisive, demogogery directed at success and innovation in America.

  • Report this Comment On May 24, 2012, at 12:08 AM, MHedgeFundTrader wrote:

    This trade was an unmitigated disaster, and hopefully it will be the worst of the year. I’m glad we had one of these because it provides a wonderful opportunity to illustrate everything that can go on with a trade. Every loss is a learning opportunity, and a loss not learned from is an opportunity wasted, and dooms one to repetition. Let me count the ways:

    1) I was too aggressive on the strike. I should have matched my long August $70 strike with a short May $70 strike instead of reaching for the extra income by selling the $72.50’s. I got away with this on the (PHM) trade. Not so on (BA).

    2) I shouldn’t have leveraged up with a 1:2 ratio. Those who did straight 1:1 spreads did much better and slept well at night. They saw only a slight opportunity cost as some losses were offset by profits in the August $70 puts as intended.

    3) I was not aware that individual investors were so harshly treated by margin clerks. Hedge funds only get charged margin on the delta plus some small maintenance, which they then continuously rehedge. Most retail investors were prevented from doing this trade by broker policies banning naked put selling.

    4) The at Morgan Stanley guy who decided to price the Facebook (FB) issue on an options expiration day has to have a whole in their head. That only succeeded in increasing market volatility. I’m sure that when they made the call, they thought this would make (FB) go up faster. Instead, the reverse happened. On Friday, everyone’s portfolio effectively turned into a long Facebook position, tracking (FB) tick for tick. This did not end well.

    5) This was a really unlucky trade. Although the global macro situation is pretty much unfolding as I expected, I didn’t think the rot would spread so fast once it set in. Even a one-day short covering rally on Friday would have turned this trade profitable. Thank Greece for that. Facebook too. It took one of the longest continuous market moves down, 12 out of 13 days, for this trade to lose money.

    6) The only consolation is that those who had puts exercised against them and saw stock delivered into their accounts Monday morning at a cost of $72.50 were granted a huge short covering rally to sell into, with (BA) rising $2.85 back up to $72. This enabled shareholders to recover 85% of their losses on the position.

    The Mad Hedge Fund Trader

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