No Need to Cry Over Falling Birthrates

Last year, the fewest number of babies were born in the US since 1979.^[i] This isn’t a uniquely American phenomenon. From Germany to China, birth rates have been trending down worldwide, prompting handwringing over a baby bust’s long-term global economic and market impact. But it is a mistake to presume birth rates have a predetermined effect of any kind—especially since they aren’t even assured to keep falling.

After a pandemic boomlet, US births returned to their longer-term downward trend. According to America’s Centers for Disease Control and Prevention, 3.59 million babies were born in 2023, down -2% from the prior year.^[ii] The general fertility rate—which refers to the total number of live births per 1000 women aged 15 – 44—fell a third-straight year, to 54.4.^[iii] The total fertility rate (which estimates the number of children a woman would give birth to in her lifetime) was 1.62, the lowest since government records begin in the 1930s.^[iv]

America isn’t alone in having fewer children. In the UK, the total fertility rate in England and Wales has been falling since 2010 (through 2022), while Germany’s birth rate hit its lowest level in over a decade last year.^[v] In China, the number of babies born has fallen seven straight years despite the government relaxing the one-child rule.^[vi] Declining births inspire visions of shrinking populations in the world’s biggest economies, leading to a reduced labor force and declining consumption that will struggle to drive economic growth.

But hold on. Fertility rates have fallen before without hindering US economic growth. Both the general fertility rate and total fertility rate have trended downward since 1970. (Exhibit 1) Moreover, the latter has trailed the “replacement rate” of 2.1—the rate that would allow a generation to replace itself—for most of the past 50 years. Yet these trends didn’t prevent the economic booms of the 1980s and 1990s—or derail America’s 2009 – 2020 economic expansion.

Exhibit 1: America’s Fertility Rates Since 1970

Source: National Center for Health Statistics, as of 4/30/2024. 2023 data are provisional.

The reason, in our view: Demographics are a long-term structural issue. Changes take years—even decades—to become apparent. They are also only one variable among many contributing to the economy’s development. A nation may have fewer young people due to fewer births, but what if its older people live and work longer—and spend accordingly? That activity contributes to economic growth. Or what if the country trends toward factory automation, necessitating fewer workers? Or if other technological developments boost productivity such that a smaller workforce is no issue whatsoever?

Then, too, birth rates aren’t guaranteed to fall indefinitely. The number of births fell from 1970 – 1973 and then flatlined through 1976. But from there, births climbed throughout the 1980s as late Generation X and the Millennials entered the world. Birth rates also normally fall as societies get wealthier. Rising living standards mean longer lifespans, while reduced infant mortality enables people to raise thriving families with fewer births. In contrast, nations with the highest birth rates also suffer more poverty—which is associated with shorter lifespans and higher infant mortality rates.

Yes, falling birth rates could have negative long-run ramifications if a true reduction in human capital and other factors don’t offset this. But that isn’t a given since a lot can change in the near and distant future. Ongoing technological advances can allow a smaller workforce to do more with fewer people. Birth rates could rebound, as they did in the 1980s. Societies could make political decisions (e.g., on immigration) that impact their population. Even if fewer babies pose a problem in the long run, stocks look 3 – 30 months out and move most on surprises. Demographic trends are widely known and well-telegraphed. Society won’t wake up tomorrow to a precipitous drop in the population—these shifts take a long time to become reality, removing any surprise power they have. And, thus, mitigating market impact.

Concerns about fewer babies are rooted in the notion population growth is tied to economic growth (i.e., any slowdown or decline in the former will hurt the latter). We have seen varieties of this false fear here and abroad (e.g., worries in the UK that output by person, as measured by per-capita GDP, is declining, which bodes ill for the future). But demographic concerns percolate in headlines regularly, similar to handwringing over the dollar or debt. To us, this says more about where sentiment is today: When well-known false fears grab eyeballs, skepticism remains pretty prevalent, suggesting the wall of worry bull markets climb remains high.