The US economy is entering a critical new phase defined by tectonic demographic shifts rather than by changes in monetary policy. At the heart of this metamorphosis is the baby boomer generation, the offspring of the Second World War’s “Greatest Generation”, born mostly from the late 1940s through the early 1960s, and now heading into retirement. Filling their shoes is the generation that came into adulthood after the year 2000, known as millennials, who now have a larger presence in the US workforce than boomers.
Boomers defined the country from the 1960s, complete with their rock and roll revolution, civil rights movement, women’s liberation and war protests and the 1990s technology bubble, helping the US economy along the way to post some outstanding rates of growth. As the curtain falls on that era, the baton is passing to millennials, who grew up with advanced technology, embrace and thrive in social media, and are tracking a very different course.
What do these demographic shifts mean for the US economy?
Retiring baby boomers finally start to save
Since the US economy is two-thirds retail sales, it matters a great deal if consumption and savings patterns change. Baby boomers heading into retirement will not spend as much as they used to in their prime years. As a result, per capita consumption will fall, paving the way for potential real GDP growth to shrink by as much as 0.5% per year, on average, for a decade or so.
Indeed, for the first time, retiring boomers will embrace a more frugal, “pay down your debt” attitude toward life. This is the generation that embraced debt and leveraged its lifestyle to new heights. So this is a huge change. The pressures of inadequate retirement savings and disappearing pension systems, however, will weigh heavily on this generation as they age into their 70s, 80s and 90s. Moreover, the younger generations that may have to subsidise the shortfalls in boomer retirement planning will also appreciate that they need to embrace different attitudes toward debt accumulation. And, the housing bust of 2007-2008 provided a valuable lesson for millennials, in that putting the lion’s share of your nest egg into one asset – your house – may not have been the best plan. The result of all these factors is that the savings rate in the US may well rise.
Higher savings rates are a good thing in the long run, promoting financing capital investment. But they can cause some unexpected consequences in the short run. Ever wonder why the sharp fall in gasoline prices did not help the economy in a big way? Well, the boomers, among others, saved a much higher percentage of the windfall than most economists expected. The typical Wall Street analysis, back in late 2014 when oil prices first collapsed, treated the fall in gasoline prices like a tax cut and expected much stronger economic growth in 2015 than actually occurred. Indeed, households did reap a $1,000 per person windfall, on average, from the drop in gasoline prices, but they saved much more than was anticipated by the “experts”.
What did the experts get wrong? They missed the tectonic shift in attitudes toward consumption and savings. In hindsight, the arithmetic is simple. Gasoline sales count as part of overall retail sales. If you were spending $50 to fill up your car’s gas tank and now it only costs $35, what happens to the $15 savings? If only $10 is spent on other consumer goods and the remaining $5 is saved or used to pay down debt, then overall retail sales do not grow as fast as they would have otherwise, and neither does real GDP.
Millennials to rearrange business models
Millennials are the first generation to grow up with advanced technology and be totally immersed in the information and internet age. They get their news from sources that might be considered unconventional by boomers, use social media aggressively, are not as brand-loyal as previous generations, and are driving an on-demand, customised approach to consumption.
In the old days, companies provided the bulk of information about their products through maybe a few magazines or TV programmes providing reviews. Now, because of the powers of social media where a commentary can go viral, companies have much less influence over how their products and services are perceived or understood. This can be an unexpected boon when a product starts to ‘trend’ on social media, but it can also be a brand-management nightmare when misinformation takes hold and sales and reputation are ruined.
The millennial-driven, on-demand social media culture, coupled with new ways to use technology, are reshaping entertainment, sports, and news. Watch your favourite show when you want to, not when a corporate executive decides you should. Have your fast-food breakfast when you feel like it, not just in the morning. Shop online in the middle of the night or at breakfast, and then have the goods delivered to your door. The role of storefronts is in flux. They can still drive sales, but these sales may occur online and not in brick-and-mortar locations.
The key point is that an on-demand culture driven by information delivered through social media means that business models have to be flexible, agile, and willing to customise the experience. One can divide innovation into two types: incremental improvements to existing products and services, and trail-blazing new ideas that break new ground. Incremental innovation defines many companies, even today. But it is the disruptive innovation potential that is changing the nature of business models and forcing companies in every industry to realise that they may need to re-invent themselves every few years.
The opportunities are incredible. And, the promise is that millennials will drive the economy to be much more flexible, adaptive, and innovative – eventually leading to potentially impressive gains in productivity. Physicists call these events “phase transitions,” like when water goes from a liquid state to become a gas. All the real action is at the boundary, where there is no new normal. Opportunity coexists with uncertainty, and the transition – well, the battle of the generations – may take a decade or two, and no sector will go unscathed.
Potential policy and investment considerations
There are many implications for policy and for investing during this transition from a baby boomer-led economy to one dominated by millennials. We want to highlight just two – one for investors and one for policy – to give a flavour of how critical these demographic forces are to analysing the economic and market environment in which we live today.
First, a key market implication has been quite powerful already. As analysts have come to appreciate the role of savings and consumer behavioural changes, thinking has evolved regarding lower oil prices. In the short term, maybe a year or two, lower oil prices work to reduce overall spending by allowing for increased savings. This is a very good outcome in the long run for savings and capital formation, even if it means a little lower real GDP growth in the short run when gasoline prices fall. The implications for equity markets, however, have been that now a fall in oil prices can depress the whole stock market due to the short-run impact on consumption and savings. As oil prices stabilise and time passes, this correlation may diminish, but it has been a very important factor in the oil-equity volatility which characterised the start of 2016.
Our second example involves implications for monetary policy. In the medium term, meaning the next five to 10 years, US economic growth may run a little slower and potential real GDP estimates may be revised downward. Our conclusion is that US real potential GDP may be only 2% per year at best. And, even more importantly, since this lower potential for real GDP is caused by fundamental demographic patterns, the causes of slower-than-desired economic growth are totally outside the ability of US monetary policy to influence. Put another way, if the Federal Reserve buys trillions of dollars of securities, as it did between 2008 and 2014, the impact on retail sales, spending, and real GDP will be negligible, even if bond yields are temporarily pushed lower. The same goes for near-zero short-term interest rates. Small changes in interest rates that are already close to zero will have very little impact on credit creation and spending, when boomers are retiring and spending less and millennials are struggling with their overhang of education loans. It is a brave new world, and one in which monetary policy is less able to influence the real economy as much as it may have been able to do in the past.
Judy Galloway is the managing partner of G-group Market Research, a boutique New York research agency that conducts digital and traditional research and publishes the G-Ometer Report, a trend report that tracks the contours, characteristics and contradictions of the culture. She teaches Consumer Behaviour and Digital Consumer Behaviour at NYU-SPS.
Bluford (Blu) Putnam has served as managing director and chief economist of CME Group since May 2011. He is responsible for leading economic analysis on global financial markets by identifying emerging trends, evaluating economic factors and forecasting their impact on CME Group and the company’s business strategy. He also serves as CME Group’s spokesperson on global economic conditions and manages external research initiatives.