Babies: a bullish indicator

Share

Are babies bullish? Let's hope so, because the U.S. fertility rate has stabilized, ending a four-year slide that coincided with the global financial crisis.

The U.S. Centers for Disease Control and Prevention reported that the fertility rate remained at 63.2 births per 1,000 women last year, according to early data reported in The Wall Street Journal . That's low, matching the record-low level in 2011 – but it ended four straight years of declines and suggests that the downturn could be over as economic optimism returns.

The fertility rate was close to 70 prior to the financial crisis. It then dropped off dramatically as unemployment surged and the housing market collapsed during the Great Recession, discouraging Americans from having babies under such dire economic conditions. Now, though, the unemployment rate has fallen to 7.4 per cent from a high of 10 per cent in 2009. The housing market is recovering and economic growth – though awfully sluggish – has returned.

As the Wall Street Journal pointed out, the U.S. fertility rate also fell during the Great Depression, as well the stagnation of the 1970s when economic growth was weak and unemployment rose amid surging inflation. The connection between economic activity and baby-making is not a spurious one: Pew Research argues that there is a strong correlation between the two. And yes, declining fertility has also been observed in Europe during its economic crisis and rising unemployment.

The bigger question is whether an improving or stabilizing fertility rate points to better days ahead – for the economy and the stock market.

For sure, a low fertility rate – regardless of its direction – can be bad news for the stock market when it leads to an aging population. As my colleague Scott Barlow has noted, an aging population coincides with lower multiples for the S&P 500. Indeed, a model devised by the San Francisco Federal Reserve suggested that retiring Baby Boomers could drive down the price-to-earnings ratio to just five by 2020, from the current P/E of 16.

Still, if an improving fertility rate signals optimism, that should be good news for the economy. It suggests that consumer spending should rise, that housing activity should recover and that economic growth will rise – all of which should be good for the stock market, which feasts on optimism.

Then again, even pessimists have kids.