If you look at U.S. history, we have had extended booms for 26 to 28 years followed by busts for 12 to 14 years – booming from 1902 to 1929 and then busting from 1930 to 1942; then booming from 1942 to 1968, and busting again from 1969 to 1982; and now the greatest boom that started in 1983 and that still continues despite recessions, the S&L crisis, Iraqi Wars and 9/11, and even violent stock crashes like 1987 and 2000 – 2002.

Why does the economy boom for decades and then bust? The simplest answer comes down to demographic trends, something most economists have never considered. New generations come along about every 40 years. As they age, they move through predictable earning, spending and productivity cycles. The peaks and troughs of these cycles can be forecasted by moving the birth index, covered in Class 3: Birth Index and Immigration, (which we adjust for the births of all past and future projected immigrants) by the appropriate number of years to estimate peak spending.

We developed this new, long-term indicator in 1988, just after the 1987 crash when most people thought the boom had ended. This indicator allowed us to predict that the economy in the 1990s would be stronger than the 1980s with a Dow as high as 8,500 to 12,000. Most people thought we were crazy, but the Dow ended up going to 11,770 in January of 2000. And after the 2000 – 2002 crash, the economy has recovered. We are still in the long-term boom that is being sustained by the rising wave of earning, spending and productivity of the largest generation in history – the baby boom.

The Spending Wave chart above is an excellent example of the predictive capacity of the birth index when moved forward the appropriate number of years. It is a quantifiable fact that the average person enters the workforce at age 20.5 today and then spends the most between age 46 and 50, or age 48 on average. This peak in spending is moving forward about a year every decade and we adjust for that in this model.

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