A potential US recession or depression is always in the back of our minds, but how close are we really?
A major downturn is unlikely to happen in the next 5-10 years for a number of reasons. Consumer spending is still strong, since the millennials are in their prime spending years, so demand is staying high. But when they age out of these years by 2032-2033, it will be a different picture. With the need for a major industrial buildout, construction will support economic activity and reduce the risk of a recession further. And of course, higher capital costs and less speculative behavior has kept the risk of a bubble low and ensured financial stability.
Like all good things, this too shall end…but when? After 2032, things will get a bit hectic. Consumption will crash as a smaller Gen Z will try to replace the millennials in the “big spender” category. And around that same time, we’ll get to see if all those investments into the industrial buildout paid off. And the cherry on top is if the US fails to expand industrial capacity before China collapses, inflation will skyrocket, and supply shortages will be the norm.
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Hey everybody. Peter Zeihan here. I am green rooming it before presentation and I am going through some of the questions from the Ask Peter Forum, and I’m picking out a couple, specifically this one is do I think there’s going to be a recession or depression in the next 5 to 10 years? Economic forecasting like that is easy.
Of course, there’s going to be, but I don’t think it’s going to be soon, and I don’t think it’s going to be bad. So let me kind of run through my logic here. Roughly 70% of the US economy is based on consumption. So if nothing happens to the consumer, it really doesn’t matter what happens everywhere else.
And the United States doesn’t have to worry about a food crisis or an energy crisis, or at least not in the traditional sense. So it really comes down to whether or not you’ve got enough people in the young age groups that are doing the consumption 20 to 45, roughly, to generate an ongoing pulse of consumption that will drive away the doldrums.
And the group that is in that block are the millennials. Now, the oldest of them are 45. So over this time period, 5 to 10 years, we are looking at them start to kind of ease back as the kids start to leave home. They’ve reached that point in their lives. Keep in mind, though, that a lot of the millennials did everything that every generation has ever done before have kids, buy cars, built homes.
But they did it with a bit of a delay. So it’s probably not going to be until the older millennials are turning 55 years from now, where we start to see that slow down a little bit, which means that probably for the next eight years, going into 2032, 2033, that this consumption should be fine. In fact, if you look back in the last decade, we’ve had three periods in that period where we would have had an industrial recession.
But consumption, primarily from the millennials, was more than enough to keep the US system chugging along. And today we have record low unemployment because we’re trying to do an industrial build out without the baby boomers labor. That would suggest the millennial labor is going to be very well compensated and the consumption picture should be fine. The second question is industry.
We need to prepare for the fall of the Chinese system, which means we need to roughly double the industrial plan to the United States in just the process of building that is going to be highly stimulatory. So on the industrial scale, we will obviously have rises and falls. That’s just the nature of the business.
It’s a little bit cyclical, but against a backdrop of massive amounts of construction. And we have seen industrial construction spending, increase by a factor of ten over the last five years in the United States. There’s nothing about that that suggests a recession to me in the next 5 to 10 years, because this is a pace we have to keep up for quite some time, even in the most aggressive period where we frontload all of it.
You’re talking about a six year process, probably going to be more. And third is finance. When finance is too cheap for too long, people start making bets on things that maybe in their retrospect, weren’t the best idea or they overplay their hand in certain sectors. So think of the dot.com bust or the subprime bust. That’s not the environment we have today.
We don’t have 0% interest rates. We have the most expensive capital we’ve seen in about 15 years. We’ve seen capital cost because of the retiring boomers, roughly triple over the course of the last five years. And it’s just a demographic issue. When you move into retirement, you liquidate a lot of your high velocity investments and things like stocks and bonds, and you move into low velocity stuff like T-bills and cash, because if you don’t and there’s a currency correction or a market crash, you no longer have the income to recover.
Which means capital costs are more expensive. And so we’re not seeing bubble activity really anywhere. And even though capital costs have increased, they were so low for so long that most folks are in a pretty good credit condition. One of the things we’ve noticed is that, while delinquency rates on loans are up, they’re up from multi-decade lows.
We have yet to get anywhere near the average delinquency rate. For the post-Cold War environment, and now the capital costs are higher. You see a lot of slowdown in things like housing, because people who are locked in a mortgage at 2%. Hello? Have no reason to move, but it also means that the debts are very, very serviceable, especially against the, very positive employment environment.
So we’re not looking at a consumption led recession. We’re not looking at an industry recession, and we’re not looking at a bubble, financial led recession. These are all really good things.
So if there is a risk, it’s certainly not in the short term. And it would probably fall into one of two general buckets. And I’m talking here like 20, 32, 2033. And on number one, we get on the back side of all of this. And the millennials start to edge out of that consumption year.
And so we see a drop off of consumption because the next generation down Gen Z is the smallest ever. And they’re just not going to be able to buy as much as the millennials have. They’re also a little bit more anti-social. But that’s a different topic. So if you get that far, then you can start talking about some sort of consumption led recession, possibly.
The second one is an industrial bust. There’s no way that you double the size of the industrial plant in a country and get it all right. And so when you fast forward to the other side of this, we will have a shakeout where things that we may be built the wrong thing in the wrong places don’t look all so hot, especially with higher financing costs. And correcting that is the I mean, basically that’s what a recession can be in the industrial space. So again, when we get to the other side of this, we will have to rationalize some of the things that we have done over the last several years. And that won’t be a lot of fun for anyone who’s in the space.
But I think the biggest concern, and I really don’t think it’s all that big of a one, is that we, we fail to rise to the occasion. The primary reason we need to double the industrial plant is because the Chinese are literally dying out. Now, let’s assume for the moment that we fail to do that, we don’t build out our capacity in electronics and material processing and electricity and everything else.
If we fail to do that and the Chinese go away during this time frame, which is highly likely. Then we have a goods shortage and then we will be trying to double the size of the industrial plants. So we will have a massive inflation story as well. One of the advantages of moving early on this is you can use the Chinese industrial plant to build the stuff that we need to build our own industrial plant.
That’s the cheapest, fastest, easiest way to do it. If we fail to take advantage of this moment in time, we will then have to do it without the Chinese. And everything will cost more and labor will be under more pressure and finance will be under pressure, and we will have shortages of manufactured goods. It will be a wildly inflationary story.
It’s still technically a growth story, but it would be an environment where inflation would probably be faster than growth. And that might not technically be a recession. But oh boy howdy, it would feel like one. So I would say that that is the biggest risk, but that would be a risk if we just decide that we don’t want to do anything that we’ve said, we’ve wanted to do for the last 20 years, and I have a hard time thinking that that’s the path the Americans are going to take.
