This is the continuation of a 10 part blog series entitled, “10 MACRO HEADWINDS IN THE FACE OF INVESTORS.”
When you want to know who or what moves the economy the most, look no further than the American consumer. Approximately 70% of GDP is composed of consumer spending that trickles its way through the economy.
Over the past decade, the U.S. economy has been the recipient of a positive double whammy. First, the baby boomers were in their prime spending years. Second, these same baby boomers over-spent by taking on large amounts of consumer debt.
Imagine a household that has $100,000 in earnings to spend. Those earnings are eventually spent and trickle through the economy. Now imagine the same family that not only under-saves but takes on additional debt by either tapping into home equity or accumulating credit card balances. They not only spend their entire disposable income but they spend far more than they take in. Extrapolate that extra amount of spending by most households and you get an over-heated economy that cannot be sustained forever.
Fast forward to the present and now we have a negative double whammy for the economy. The highest consumption for consumers takes place between the ages of 45 and 49 years old (with peak spending at 46 years old). That’s when most people spend the most money in their lifetimes; raising kids, buying and furnishing bigger homes, upgrading automobiles, clothing, restaurants, travel and large amounts of discretionary spending. Not only can consumers not keep spending borrowed money, but eventually they spend less as the result of having to pay back principal and interest on all the debt they accumulated during the last multi-year spending spree.
There are 79 million baby boomers in the United States and that large group of people has just made their way through their peak earning years and now is on the other side of the mountain. Naturally as people make their way into their 50’s and 60’s, priorities change. People start to focus and worry more about retirement, savings, and a career that will be soon winding down.
We now have a large percentage of those baby boomers that find themselves up to their eye balls in debt, approaching retirement and underfunded for their golden years. Is it reasonable for us to assume that they will continue their high spending ways of the past?
What we should expect is reduced spending by the largest demographic of our population. These baby boomers should now have far less consumption as we move forward than they did during the past decade. They not only have to ramp up savings for retirement, but they are finding themselves struggling to keep their jobs, all the while facing a mountain of debt to pay off. Many aren’t on track to have their primary mortgages paid off prior to retirement and lack an inability to sell their McMansions to downsize their lifestyle.
Naturally as we age, we become less productive in the workforce. We lose technology skills, can’t (or won’t) work long hours or travel extensively. Aging workers become obsolete or too costly compared to a younger, more skilled and harder working labor force. It’s not uncommon for wages for aging workers to decrease as they approach retirement.
And with reductions in retirement benefits, reduced pensions, lower social security and Medicare, the future isn’t too rosy for baby boomers to be spending large amounts of cash on discretionary items in comparison to their wild spending days of the past. All this leads to a slower consumer economy that will face investors as we move forward.
A similar demographic shift has been occurring in Japan over the past decade and it has not been pleasant for their economy. The population has been aging while spending has been declining putting deflationary pressure on the economy and financial markets.