Anthony Paul from Morgan Stanley Wealth Management explains.
Personal consumption accounts for the majority of the U.S. GDP, at almost 70% of the economy. Since the 1980s, the Baby Boomer generation—born between 1946 and 1964—has been an enormous engine of that spending. But as the Boomers pass the torch of “largest generation” to the Millennials, there are several things to consider: Will the younger generation provide the same engine for GDP growth that the Boomer generation has? Will they have similar spending patterns? And how should investors position their portfolios to make the most of this transition?
Millennials have grown up in the shadow of the Great Recession, are saddled with higher education debt and housing costs, and are forming households later. These factors dramatically affect how Millennials spend. As these consumers start to age, their spending increases. The U.S. consumer’s peak earnings, spending, and investing years are between ages 35 and 55. This increase is most noticeable in housing and insurance, as the next generation settles down and starts families. In 2016, the first Millennials turn 35 and begin entering their peak spending age. Their spending is expected to increase 25%, driving demand for new homes and financial security. College loans may be swapped for home loans and life insurance as this new generation takes on the responsibility of economic growth.
Boomers control 70% of the nation’s disposable income. This is partly driven by accumulated income, but also by longer careers. That means the Boomer generation will still maintain enormous spending power. With that said, the oldest Boomers are past their “peak consumption years”, therefore they are spending less in key categories like transportation, housing and apparel. The greatest boom in spending for the Boomer generation will be in health care. Boomers are expected to spend 3.4% more on health care than their parents did.
As Millennials enter their peak consumption years and Baby Boomers live longer, the two groups will provide a consumption boost that will increase U.S. GDP. Within this growth, there will also be important spending shifts: watch for relative outperformance of health care, housing and entertainment, and relative under-performance of education, apparel, and transportation as the country matures.