Decrease in Spending from America's Young Promises Future Economic Crisis
Demographics.
Unless you're a statistician, the topic is as exciting as a Green Party stump speech.
But it matters.
Today's young people spend significantly less of their income in the real economy—and
their numbers are growing.
This acts as a permanent headwind to economic growth and assures economic crisis in the
not-too-distant future.
That's because the sheer volume of young people—the so-called Generation Xers and
Generation Yers—comprise a rapidly growing slice of the population.
As we can glean from the table below, in 2010, people aged 45 and older comprised six of
the top 10 most common ages groups.
By 2016, it was down to only two.
This is graphic evidence that America's young will exert a greater proportion of economic
output going forward.
And that might not be a good thing.
Why?
Because young people spend far less of their income than those a generation or two earlier.
According to Toronto-Dominion Bank (NYSE:TD), even though millennials make more discretionary
purchases than older people, they spend less money than the average consumer.
After accounting for a basket of spending inputs, Generation Xers spent 23% less than
baby boomers, while millennials spent 27% less.
That's a significant problem when you're talking about tens of millions of people in
each category.
Of course, with each passing day, the younger generation becomes an increasing portion of
total consumer spending, worsening the problem.
It's a slow-moving demographic and economic crisis with no clear solution.
Simply put, unless attitudes significantly change among America's youth, the free-wheeling
days of carefree consumer spending are over.
America's young are carrying the cross of stagnant wages and higher debt loads.
Both limit the amount of discretionary income available to spend.
This is leading to changes in spending patterns.
America's youth aren't shopping less by volume; in fact, they're shopping more.
They aren't boycotting the malls or shunning consumerism.
According to TD's metrics, discretionary purchases are up (see above).
But what they're clearly doing is spending less on the items they do consume.
For example, millennials eat out on average 13 times per month, compared to just five
times for baby boomers.
Yet, millennials spend just $103.00 per month versus $139.00 for boomers.
Multiply this example to a thousand other ones, and soon you're talking about real
money.
Whether America's young are simply content with living within their means, disavow the
excesses of their parents, or are simply broke—the spending slowdown is real.
It makes us wonder whether future investors will spend less money on stocks, too.
Boosting Consumption Proving Difficult
The most powerful economic minds in America are constantly looking for ways to boost consumption.
Whether that's the Fed Reserve Chairperson or CEO of a huge multinational corporation,
lack of consumption growth is causing mature economies to fail.
The Fed has been trying for eight years to boost growth through ultra-low rates to meet
inflation and growth targets.
It's mostly failed.
It's not like people don't want more or better stuff, but there's a limit on how
much one can borrow.
If I only make "X" amount of money and my real wage hasn't risen in a decade, I
can simply only take on "X" amount of debt.
Short of banks paying the consumer interest to borrow (which amazingly, does happen in
some situations), debt saturation will always limit growth.
Take the $1.4 trillion student loan debacle as a prime example.
That number is $620.0 billion more than total U.S. credit card debt, and works out to $37,172
for each 2016 graduate.
So already, so many of America's young are saddled with significant debt even before
they've earned their first entry-level paycheck.
Is it any wonder why they've become so thrifty?
Call it adaptation, call it survival instincts.
But the fact remains, with wage growth consistently lagging behind real inflation; with younger
generations saddled with high student debt; with workplace automation threatening to pare
back job growth, we doubt young people will carry the growth torch.
The most "spend-sational" generation has come and gone.
It's not coming back.
Thus, the Federal Reserve and corporate America have an impossible task.
How do you boost consumption when a growing army of youth guard the purse strings?
Lower credit standards, cheap credit, and financization of the economy have already
been tried.
It worked great while it lasted, but that growth engine is dead.
There are no easy solutions.
And with increasingly fewer "spend generation" folks able to prop up a debt-riddled construct,
future economic crisis is assured.
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