Alpha.Sources — Alpha Sources.CV

Delayed Gratification - Why are global birth rates falling, and does it matter?

This is the final chapter in the first part of my long-running demographics project. In the previous chapter I described the quantum effect of fertility, which hypothesises a negative relationship between fertility and rising incomes as parents substitute quantity for quality in their reproductive decisions and child-rearing. But can the quantum effect explain why birth rates in one country after the other appears to be stuck below the replacement level, and why global fertility will soon drop below that same level? The answer is no.

To understand current and more recent post WWII global fertility trends—broadly since the 1970s—we need to introduce tempo effects to the analysis. Tempo effects describe the tendency of women to postpone the timing of their first child. By mathematical logic, prolonged tempo effects can drive significant population ageing, but a more fundamental question is whether birth postponement also has a lagged effect on quantum, or more precisely, cohort fertility. This chapter discusses these question in the context of the hypothesis of a Second Demographic Transition, SDT, and presents a number of case studies to explore the specifics of recent fertility trends in key countries and regions. The chapter finishes by discussing the idea of a fertility trap, and whether the increasingly accelerating decline in global birth rates are a problem, drawing on the recent polarisation in the debate on this issue.

Time Series Regression Analysis with Chat GPT4

The following chart is one of hundreds that I use in my day-job as Chief Eurozone Economist at Pantheon Macroeconomics. It plots a normalised Z-score index of surveyed new manufacturing orders in Germany alongside year-over-year growth in factory orders, ex-major orders. It’s worthwhile spelling out the meaning of this chart in the world of economic research and forecasting. The factory orders numbers are so-called hard data, which in this case means that they’re official numbers of real activity reported by the statistical office. The PM new orders index, by contrast, is my home-cooked index of so-called soft data. Specifically, these are survey data, compiled by the likes of the EU Commission, IFO, S&P, and national statistical offices. We’re only interested in these numbers to the extent that they tell us something about the official/hard new orders data, which in turn could help us pin down trends in industrial production, exports, GDP growth, employment and so on. From simply eye-balling the chart, the two series look coincident, but note that the surveys are released ahead of the official data, so that we always have survey numbers that are one-to-two months ahead of the official data. In other words, when it comes time to forecast new orders for the month of December, we will already have survey data for that month. This should, in theory, help us to better forecast the official real new orders data.

Is a soft landing in the bag?

According to U.S. Treasury Secretary Janet Yellen economists who predicted that a sustained period of high U.S. unemployment—and perhaps even recession—would be needed to bring down inflation are now “eating their words”. This follows earlier comments by Ms. Yellen last month that a soft landing is “on track.” Claudia Sahm, a US macroeconomist, agrees. In an interview with the FT earlier this month, she says:

The soft landing is not here yet. But it is in the bag.

Markets seem to agree with the assessment by the Treasury Secretary and Ms Sahm; bonds have rallied like a bat of hell in the past month—temporarily pegged back by a semi-hot NFP report on Friday—and equities are in a good mood too. November, I am reliably told by the financial media, was the best month for a standard 60/40 portfolio … ever. And why wouldn’t markets be celebrating? Inflation in the developed world is now falling rapidly, and what was a significant inflation shock in core prices has now been turned on its head, as the charts below show.

The great (bear) steepening

Everyone is talking about the sell-off in bonds these days. Yields on the US 10-year benchmark is up nearly 150bp since April, within touching distance of 5%, and 30-year yields are now just over 5%, up from 3.7% in April. With the two-year yield up just 100bp over the same period, the curve has bear steepened by 50bp, and is now looking to un-invert due principally to a sell-off in long bonds, contrary to widespread expectations of bull-steepening via a rally in the front end. The 2s10s is still inverted by around 17p , but the 2s30s is now—as far as I can see from the close on Friday the 20th of October—just about positive. No wonder that the long bond is on everyone’s mind. Sustained bear-steepening during inversions are rare sights in G7 bond markets, so when they are spotted in the wild, they tend to grab the attention and imagination of investors and analysts. But what does it mean? Put on the spot, I’d say that bond market volatility is underpriced.

02

Alpha Sources Blog