Is the Baby Bust Finished?

by Charles Sizemore | August 12, 2013 1:48 pm

Americans stopped having babies when the financial crisis hit in 2008.

I exaggerate, of course; nearly 4 million babies were born in 2012. Yet this number was an 8% decline over the pre-crisis level, and this despite a rise in the number of women of peak childbearing age.

When you look at the fertility rate (births per 1,000 women aged 15-44), which takes into account the rise in the number of women in peak childbearing age, the story looks a lot worse. American fertility hit a new all-time low in 2011, at barely 63 births per 1,000 potential mothers, according to the Pew Research Center.

Those of us who are not professional demographers have a hard time conceptualizing “births per 1,000 women,” but the “total fertility rate” is a little easier to understand. This is the total number of children the average woman can expect to have over her lifetime.

In the developed world, the “replacement” total fertility rate is 2.1 babies per mother. By this measure too, American fertility had sunken to new recent lows at 1.9 babies per mother. As I wrote last year, the American birthrate — long the pride of red-meat-eating Americans — is below the level of France[1]. France!

If you’ve read my work for any length of time, then you know I believe this trend to be temporary. The baby boomers of the 1950s and 1960s had a baby boom of their own in the 1980s and early 1990s. Now this generation — alternatively called the “Millennials,” the “Echo Boomers” or “Generation Y” — are entering their family formation years, and you can expect another baby boom as a result.

The sheer number of potential mothers makes it all but inevitable.

New birth data suggests that the post-crisis baby bust might be ending. Preliminary data for 2012 shows that births and the birth rate are essentially unchanged from 2011[2] after declining every year since 2007.

This is a big deal. And let me tell you why:

Children and family formation have a massive, disproportionate effect on the economy. There are the obvious beneficiaries — makers of everything from diapers to baby formula to cribs — but the most important effects show up elsewhere.

Consider housing. Before my first son came along, I was living the life of a frivolous urbanite, renting an uptown apartment and happily avoiding the responsibilities of homeownership. Today, I own a house in the suburbs … along with the mortgage albatross hung around my neck. I even have a tree swing in the front yard, and a bouncing house with a slide in the back.

The point here should be clear: An uptick in the birthrate should mean a boom in the starter home market, which in turn means a return to normalcy for banks. This is a sustainable, virtuous cycle that has yet to really begin. Get ready for it.

Less directly — though by no means less importantly — are harder-to-quantify metrics such as productivity. I’m more productive that I was pre-kids. I have no choice. I have hungry mouths to feed.

Before you dismiss the last point as fluff, consider that the biggest productivity boom (and consequently the biggest drop in inflation) in the lifetimes of anyone reading this article came in the early 1980s, as the baby boomers were in the early stages of their family formation cycle. Yes, Fed monetary policy under Paul Volcker had a lot to do with the drop in inflation. But don’t underestimate the long-term effects of the baby boomers getting haircuts and real jobs on productivity growth.

Generation Y’s peak birth year was 1990. The average age of mother at first birth is around 26 years … which is a number that continues to rise due to would-be mothers staying in school longer and getting a larger share of advanced degrees.

So, doing a little math here, we can add 26 to 30 years to 1990 and come up with an estimate for a boom in new mothers peaking in the years 2016-2020.

All babies are roughly equal in terms of demand for staple items like formula, diapers and clothes. But first babies are more economically significant than their later siblings because they are the ones that force their parents’ lifestyle change. If I may oversimplify a little, they are the reason we buy homes and furnish them.

What are we to do with this information?

You could buy shares of infant formula makers such as Abbott Laboratories (ABT[3]) or Mead Johnson (MJN[4]), of course. Though being global companies, these companies tend to be as affected by births in China as births here in the United States. And you also could buy shares of diaper producers such as Procter & Gamble (PG[5]) and Kimberly-Clark (KMB[6]), though the same logic applies.

For more direct exposure to an American baby boom, consider buying a portfolio of starter homes with a goal of eventually selling out to a Gen Y family in a couple years. Or better yet, consider starting a new business that caters to new mothers and their kids.

You want some examples of low-hanging fruit? How about a website with product reviews of strollers, cribs and other baby products with an online store that links to a major retailer like Amazon (AMZN[7])?

Or better yet, a handyman service for assembling baby gear to save fathers like myself hours of late nights of cursing and reading undecipherable instruction manuals upside down.

 Charles Lewis Sizemore, CFA, is the chief investment officer of the investment firm Sizemore Capital Management. As of this writing, Sizemore Capital is long ABT, MJN, PG, and KMB.   Click here[8] to receive his FREE 8-part investing series that will not only show you which sectors will soar but also which stocks will deliver the highest returns. The series starts November 5 and includes a FREE copy of his 2014 Macro Trend Profit Report.

Endnotes:
  1. is below the level of France: http://charlessizemore.com/american-virility/
  2. births and the birth rate are essentially unchanged from 2011: http://www.calculatedriskblog.com/2013/08/us-births-essentially-unchanged-in-2012.html?utm_source=feedburner&utm_medium=email&utm_campaign=Feed%3A+CalculatedRisk+%28Calculated+Risk%29
  3. ABT: http://studio-5.financialcontent.com/investplace/quote?Symbol=ABT
  4. MJN: http://studio-5.financialcontent.com/investplace/quote?Symbol=MJN
  5. PG: http://studio-5.financialcontent.com/investplace/quote?Symbol=PG
  6. KMB: http://studio-5.financialcontent.com/investplace/quote?Symbol=KMB
  7. AMZN: http://studio-5.financialcontent.com/investplace/quote?Symbol=AMZN
  8. Click here: https://order.investorplace.com/?sid=OA8158

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