It all started last weekend when my wife texted me a picture of months-old babies lined up on a couch at a friend’s house. While the photo included five tiny tots, actually, there were a total of 10 babies on display! The very next night we had a group of friends to our house for dinner and there were no fewer than four young couples that will likely celebrate their nuptials within 18-24 months, and we all know what happens then. The fact that I received news this morning that a young man in our office was now the proud father of a healthy 8 pound 7 ounce baby boy only adds to the anecdotal evidence of some larger demographic happening. However, a closer look at the facts informs us that a new demographic trend is developing and it offers meaningful economic hope.
Demographers generally define those people currently between the ages of 18 and 37 as Generation Y or Millennials, most having entered adulthood after the turn of the century. Interestingly, these Millennials snuck up on us, not only in terms of their numbers, but their spending power as well. Generation Y is now 86 million strong and currently represents 27% of the population – outnumbering the baby boom generation, which has just over 80 million members and represents 25% of the U.S. population. When factoring in immigration, the Millennials could grow to over 88 million by 2020. As for spending power, the Millennials represent huge potential. Consider for a moment that the baby boomers reached their peak spending years in the 1990s and were largely responsible for an average 3.4% GDP growth during those years. If a similar pattern occurs with Generation Y, GDP growth could be boosted a full percentage point or more from current levels. To be sure, 3.5% growth is the elusive economic elixir necessary to combat mounting debt levels.
Millennials got off to a very slow start as the first decade of their adult lives was plagued by two recessions, one classified as the Great Recession in recognition of its magnitude and its historical significance. Moreover, the stock market was flat for Millennials over their first decade as investors. This slow start delayed Gen Y’s job development and household formation, two huge contributors to economic growth. However, the Y Generation now accounts for $1.3 trillion of consumer spending and they are just hitting their stride. The job situation for Millennials is improving and with it the prospect for increased spending on places to live, food to eat, clothes to wear, and cars to drive. Notwithstanding a late start, Millennials are not only well educated but also understand the harsh realities of underfunded entitlement programs, which have made them more skeptical of and less reliant on future government assistance. According to Vanguard, Gen Y is investing and they aren’t afraid of stocks. Mr. Market’s relentless move up to the right may, indeed, be discounting more than short term improving economic fundamentals and may be taking notice of the meaningful Millennial fire power in the years to come.
The demographic trends preceding Generation Y tells a story all its own. The aging baby-boom generation here in the U.S., once a magnificent growth engine, has peaked and now provides little help in pushing GDP growth to historic norms. There are now more Americans age 65 or older than at any time in US history and the number is estimated to more than double by 2050. Not only are baby boomers getting older, but improving healthcare has lengthened life expectancies, the combination of which has swelled the ranks of those eligible for the entitlement programs known as Social Security, Medicaid, and Medicare. It is no wonder that these programs are underfunded and subject to ongoing debate as to their fate.
If ever there was a poster child for the woes of an aging population it would have to be Japan. Japan’s demographic reality has been discussed for years by economists who have attempted to predict the country’s fate and by hedge fund managers who have bet that the aging population of Japan will be ruinous to their economy and their currency. While Japanese Prime Minister Shinzo Abe’s structural reforms (Abenomics) and the Japanese Central Bank’s American-styled quantitative easing policy ignited a rally in Japanese equity markets, it now appears that Japan’s bad demographics may be too much to overcome. There are a growing number of believers that Japanese demographics have baked-in a very dire outcome for the country. Time will tell.
Generation Y is a massive differentiator when comparing the impact of demographics on the US and Japan. The size and nature of the Millennial Generation has the potential to have a hugely positive impact on the economy. Forbes Magazine noted the following: “No generation before has had as much access, technological power, or infrastructure to share their ideas as quickly as Millennials. They are used to speed, multi-tasking, and working on their own schedule. These can be great assets in a knowledge-based economy that values end results over process.”
Of course, Generation Y is not without its challenges. Profligate spending of previous generations has burdened this new generation with a huge mountain of debt, the cost of which is mitigated by low interest rates, but the principal balance remains. Moreover, Generation Y has been saddled with a diet of trans-fatty foods and an exercise regimen of video games, the tragic combination of which has led to an obesity epidemic. It is sad to acknowledge that Millennials could be the first generation in over 100 years to see their lifespan level off or even decline.
The Millennial Generation appears to be relatively well-equipped to meet their inherited challenges and those yet to come. Generation Y has a deep bench of well-educated, socially-connected, tech-savvy Americans that will likely exceed the economic growth engine of the Baby Boom generation. Time will tell.
Telemus Capital Investment Committee Chair
September 20, 2014
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