How Will Shrinking Boomer Spending Affect the Economy?

Here is an interesting graphic that looks at various personal finance metrics related to the baby boomer and silent generations:

Graphic courtesy of the WSJ.

It's worth noting that the data above probably doesn't include a lot of the stock market losses from the past month or so; and it may not anticipate a prolonged recession occurring that spans multiple years and/or the U.S. having its own lost decade. Additionally (and I hate to harp on this point), adjusting the numbers for inflation is somewhat spurious, as the inflationary figures produced by the Government lag the real inflation actually felt by consumers in their wallets. Finally, the numbers above are averages and, as such, are heavily influenced by outliers (Baby Boomers dominate the Forbes 400 after all). As a result the typical situation being faced by the average middle income boomer (especially when you factor in my other caveats) will undoubtedly be much worse come 2015.

The graphic comes from a WSJ article that discusses the economic impact of changing demographics on the economy of the U.S., as well as the propensity of the Baby Boomers spend instead of save, in addition to using debt to finance their lifestyles.

Affluent Boomers had more to spend than most of their Depression-baby parents could have dreamed. Their appetites buoyed sales of everything from Bavarian sedans to Sumatran coffee to Swedish furniture. Boomers could make or break a brand. Boomers embraced Toyota, and helped make it the world's dominant car maker. They shunned Oldsmobile, and it died. Boomers have driven the explosive growth of the computer and consumer electronics industries, accounting for half the money spent on techno-gadgets, big-screen televisions, laptops and the like, according to McKinsey.

When Boomers ran out of cash, they financed their dreams. The U.S. household saving rate plunged to 2% of income in the 2000-2005 period, when Boomers were hitting their earning peak, from 10% during the early 1980s. Imposing McMansions sheltered occupants with five-figure credit-card balances, exotic balloon mortgages and V-8 powered sport-utility vehicles financed over five and six years, all adjuncts to a lifestyle that depended on cheap credit and cheap oil…

…Until now. Some economists and demographers say the Baby Boomers themselves are driving the current turmoil. As Boomers send their kids out into the world, they are entering the phase of life when income starts to fall, spending slows and houses get sold. The same generational heft that Boomers used to create fads for hula hoops, sport-utility vehicles and Harleys will now work against them as all of them rush to cash out and slow down at once. That puts more houses up for sale to far fewer buyers: a younger generation that is also less able to afford them.

"The generational crash is when there are too many older homeowners and not enough buyers," says Dowell Myers, a University of Southern California professor.

"This is like winter coming," adds Harry S. Dent, an author and consultant who says the U.S. is headed for a slump that will last until 2020. It will take that long for the financial wreckage from this boom-bust cycle to be cleared away, he says, and for the 79.4 million strong "Millennial Generation" -- most of whom are still in high school or college -- to enter adulthood and start buying homes, cars and gadgets of their own. "It happens once every 80 years," Mr. Dent says of this sort of demographics-driven economic cycle. "It's going to be difficult.

But even if these pessimistic views prove overdone, the U.S. economy will need to find a way to grow without relying on Boomers spending their last dimes. Companies that depend on Boomers are hunkering down for the short term and re-evaluating what it will take to succeed long term.

I think it will be hard to make predictions in a situation like this as it's a largely unprecedented economic shift, and it's hard to identify all the areas that will be affected as the boomers are forced to pull back on their spending and/or change their financial habits. While some of the predictions (generally) will be spot on, I suspect that there are probably dozens of unforeseen consequences and changes that we won't be able to predict and will have to just react to once they happen.

For instance, as the Baby Boomers pull back it will force many people my age (late 20s early 30s) to pull back on their own spending, as I'm aware of multiple people my age who are being subsidized by their parents in some fashion (despite the fact that many of them have middle to upper middle class incomes.) While only a small minority % of my peers are in this situation (at least to my knowledge), it will still have a significant impact as people are forced to re-adjust, operate without a safety net, cut back on luxuries, etc.

Even if it's only 5% of boomer spawn that have to cut back on discretionary spending due to no longer having parents that pay car notes for them, pay their insurance, cell phone bills, etc, it's going to have a marked impact on someone.

How the economy fares over the next 5-10 years is probably the biggest  "X factor" with regards to this demographic shift, as it could very well be the biggest driver of changes to Baby Boomer financial habits. A prolonged recession could force people to pull back on their spending earlier than anticipated, push some into bankruptcy, force others to delay retirement/stay in the workforce longer, their kids may graduate college with higher debt loads, etc.

It could also create a situation where the offspring of the boomers decide to live a less ostentatious lifestyle as a result of watching their parents struggle financially/live above their means. Just as I have peers who are being subsidized by their parents I have others who significantly more frugal than their parents/live below their means, as they don't want to encounter any of the hardships their parents did and/or just want to be more financially stable.

No matter how this all plays out it's going to be interesting, and calls for a resetting of expectations within certain industries (retail in particular) around future spending patterns, willingness to embrace debt, etc.

You can read more here.

Comments

[nmelendez:]

With the amount of extra money pumped into the economy, baby boomers pensions will reduce in buying capacity. Future inflation is going to kill them. They will be forced back into the market or risk being left behind. There volatiIilty is going to reduce their savings. I foresee a future where money becomes much more fluid.

2008 Oct 22 07:10 PM

[The Sentinel:]

cruise9806 sez: "With the amount of extra money pumped into the economy, baby boomers pensions will reduce in buying capacity. Future inflation is going to kill them. "

Correct. Also correct is the untold story of subsidization of this generation by the "Worst Generation". As Boomer socialization collapses as the U.S. embraces it with Gen 1 socialism from Bush the Stupid and Gen 2 socialism from Barack the Bolshevik, the (Complete) National Debt which stands at nearly 60 trillion dollars when you combine National Debt, Medicare, Social Security, Pensions, and VA benefits, will overwhelm the entire net worth of America which is @ 80 trillion...(that's counting just the entire net worth of the country if you sold off everything real such as land, businesses, mineral rights, savings, etc. and discounting all worthless paper values.)

The only thing we can do is to default now while we have a chance to control our destiny going forward. This will cause a calamity the likes the world has never seen. Riots will insue, insurrection against the government may happen. Governments worldwide would fail and war would be the norm. But better now at 60 trillion than at 80 or 100 or more. And better we tell every one who funds our debt to frag off before our debt holders tell us how America should be ordered.

Not that that is not happening in some fashion even now.

2008 Oct 22 09:55 PM

[cabear:]

Barack the Bolshevik will take care of everything. Hope for Change! (to be left in your pockets)

2008 Oct 23 12:54 AM

[investor88:]

Excellent article which examines national economics from demograhic angle, plus insightful comments from Harry S Dent. A minority says secular recession to 2020 which is heresy and unbelievable to the average investor and bullish experts. We have to be prepared for all eventualities including recessionary conditions to 2020! but ok to hope for the best.

2008 Oct 23 05:02 AM

[Ageless:]

The WSJ article paints a vivid picture of what "can be" in terms of frightening economic consequences in an aging consumer-driven nation.

To learn more about the harsh consequences we face in our struggling economy as well as about the role of Boomers in digging our way out of the problems we face, read the just published book, RETURN OF THE BOOMERS available on the aforementioned website or on Amazon. In it, the co-authors answer the questions: Can America compete in a changing world? Can we work our way through the stormy days ahead? The book makes the case for urgency in terms of the actions we must take in order to strengthen our organizations in the context of demographic realities and a new world economy.

In simple terms, we cannot tax our way out nor can we spend our way out of our problems. We can only work our way out. It will take all of us!

RETURN OF THE BOOMERS recommends strategies for leaders and the mature workforce to help regain America's competitive strength as well as to keep our consumer-driven nation earning and spending.

2008 Oct 23 08:01 AM

[8 Alpha-Zulu:]

What a well written piece Markham. I track and pay very close attention to this phenomenon as it is exceedingly important to business model. I think you hit things right on the proverbial nail head. What concerns me about many of the younger end of this distribution (group) that are many forthcoming John Galts (see Atlas Shrugged) embedded therein. If we try to tax our way out of this, I can see many of this psychographic/demograp... throwing up their hands and just checking out. This, plus the culture of the ones that follow directly behind them, i.e. the Generation X'ers could have the real ability to destroy rather than re-build from here given their significant overtones of cynicism against things held dear to the previous generations. In fact, I believe that most Gen-Xers are all John Galts in training. G-d help us.
-8-Alpha-Zulu

2008 Oct 24 04:05 PM

[Poor Boomer:]

As soon as I read the title, I thought of Harry S. Dent (Jr), who published a 1990-ish book called The Great Boom Ahead. (Not surprisingly, he is cited in the WSJ article.) In that book, Dent noted the advance of the boomers into their highest-spending years, and predicted the economic slowdown which would follow the boomers into declining life-cycle spending.

As I recall, Dent predicted the slowdown to arrive circa 2010, which would put him close to target.

p.s. I've read a lot about affluent and middle-class boomers - does anyone have a forecast for poor boomers?

2008 Dec 05 02:43 AM