I Just Want to Say One Word to You - Demographics

As the economic data rolls in, it just gets worse.  The economy is expected to have contracted in the first quarter by the time they report final numbers.  The second quarter, which historically balances out a slow first quarter, isn’t looking much better so far.  This is despite rock bottom interest rates from the Federal Reserve trying to boost economic growth.  There is increasing evidence that this problem is structural, not cyclical.

I find behavioral finance, the study of why humans often act irrationally when it comes to money, the most interesting field of economics.  Another area of economics that interests me is the impact of demographics.  As a “trailing” Baby Boomer, I’ve had a front row seat on the impact of my generation’s behavior on our country’s society for the past 40 years.  As this large human bubble has progressed through the American population, its impact has been profound.  For better and worse, the Baby Boomers have driven supply and demand, social mores and tastes for decades.  With the oldest Boomers now pushing 70, our impact on the economy and society is waning.  Older boomers are likely to pare back spending as many are concerned about making their money last.  Younger boomers are busy trying to play catch-up with their savings and aren’t about to be going on a major buying binge any time soon.

The boomers are passing the baton to the so called Millennials (age 18-34) and Generation X (age 35-50).  Generation X is small relative to the overall population. They have had a few benefits to help their economic situation.  Most didn’t have significant savings to take a hit in the dot-com bubble and many likely still had very little going into the financial crisis.  After years of getting shut out of the home market, they were finally able to buy a house when prices came down during the financial crisis and many should have built up significant home equity in recent years.  While they will not likely enjoy the financial tailwinds of the Baby Boomers, generally they should be able to manage the typical American lifestyle and ultimately retirement.  They will face the astronomical costs of educating their children though, and sheer fear of what that will do to their finances keeps even wealthier Gen X’ers from making large discretionary purchases like a second home, a boat, a luxury car or fancy vacations.

Unfortunately, it looks like the Millennials will struggle more than any American generation.  They are already the most indebted population in our history thanks mainly to student loans.  Many of the better paying jobs are still occupied by Generation X and the trailing Boomers who aren’t as rich as their older counterparts and are not going peacefully into the good night.  Housing costs have skyrocketed for both renters and buyers and the slow growth of household formation among this youngest of adult generations is an objective measure of that.  College for their children isn’t likely to get any cheaper. With interest rates near zero and economic growth grinding slowly at best, investments are not likely to perform as they have for prior generations unless there is a major move up in interest rates and a major move down in the stock market that gives them a better entry point for investments.  Private and even public pensions may disappear entirely during their working careers.  Social Security will probably continue to exist, but benefits will start years later in life. 

Millennials are now the largest cohort in the workforce and their forward economic progress should be a life buoy for the American economy.  Instead they risk becoming an anchor through no fault of their own.  Added to the large and growing number of Boomers living on fixed incomes, we may find that the two largest portions of our population will be a drag on the economy for a couple of decades. Houston, we don’t have problem just for you.  It’s a problem for the whole country.  That problem has a one word name - demographics.

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