The Boomer Bust

With the housing markets, retail sales, and the general economy trapped in a downward spiral, the Baby Boomers have become the “Baby Busters,” to quote Joe Clark, a board member of the HS Dent Advisors Network, and this reality is starting to be noticed by the financial press. Writing for the Wall Street Journal, Joe White offers one of the best commentaries on the aging of the Boomers that we have seen to date in a major financial publication. Even the title used for Mr. White’s article is insightful: “Boomer Bust: How Will the Economy Rebound Without Post-War Babies Financing Their Harleys?” That’s a fine question, and one that we ask quite regularly ourselves.

Mr. White writes: 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....

Of course, with wage growth stagnant for most of the 2000s, much of this extravagance was financed with cheap credit, which suddenly evaporated in 2008 as the banking sector fell into crisis. The Boomers earned more money than any generation in history, but they also spent more than any generation in history, and they tended to do so with a self-indulgent reckless abandon that banks and consumer finance companies were all too happy to accommodate. To be fair to the Boomers, as a generation they worked hard for their success and deserved to enjoy the fruits of it. But now, as they scale back their lifestyles to save for retirement, their absence from the table of conspicuous consumption will be noticed by all.

As Mr. White continues,

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.

If this sounds a lot like HS Dent research, it’s because it is. Harry Dent himself was interviewed for the article:

"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."

Indeed, it will be.

The Wealth Effect

We have an ongoing commentary on the wealth effect. For the most part, we view it the same was we view most other economic and market maxims and rules of thumb: it’s a nice-sounding theory that doesn’t hold up well to empirical analysis. That said, we found Mark Gongloff’s recent comments in the Wall Street Journal to be noteworthy:

Through the second quarter, the net worth of U.S. households and nonprofit groups had fallen for three straight quarters, the longest stretch on record, wiping out nearly $2.7 trillion.

It isn't clear how much this lost wealth will weigh on consumer spending. Some economists dispute the existence of a "wealth effect." In the dot-com blowup, consumers kept spending even as paper wealth faded.

This time, however, there are fewer sources of strength. Tighter credit and still-falling home values are hurting middle-income families, while plunging stock values are hurting the wealthy.

We would still contend that the Wealth Effect is pure fantasy, though Mr. Gongloff does hit on some important points. Even though the average American took a blow to his or her net worth in the aftermath of the 2000-2002 tech bust, credit remained loose. With access to the means to spend, American consumers were able to satisfy their spending impulses for everything from McMansions to luxury coffee. Demographic trends fueled the desire to consume while the financial sector provided the ability. With the financial system in tatters, the means to continue spending has now been taken away. And even if the banking sector is successfully recapitalized and returned to financial health, a process that even in the best case scenario will take many months if not years, it is doubtful that American consumers will be as willing to use consumer debt to fund their purchases. The Boomers will have moved on to the next stage of their lives, saving for retirement.

This trend is also evident oversees. Writing for the New York Times, Sarah Lyall writes,

The expensive stores along Bond Street and Sloane Street have fallen eerily quiet, as have the cheaper ones scattered all over town. Britons are coming down from their huge spending spree, and alarm about the future is coursing through the nation like an electric current, as it is everywhere.

But there is a parallel thought in the air: perhaps the downturn, however painful, will lead to a return to the values of the past. Perhaps the last 15 years or so will be considered a sort of madness, an anomaly, a strange dream. In a country whose modern identity was forged in part by postwar principles like thrift, prudence and living within your means, perhaps people will lower their widely inflated expectations and go back to making do.

There is certainly ample historical precedent for such a transformation. The “Roaring 20s” gave way to the sobering Great Depression, which made prudence and financial conservatism the trend for roughly the next 30 years.

References

White, Joe. “Boomer Bust: How Will the Economy Rebound Without Post-War Babies Financing Their Harleys?” Wall Street Journal, October 21, 2008

Gongloff, Mark. “'Wealth Effect' Faces Big Test in Downturn,” Wall Street Journal, October 21, 2008

Lyall, Sarah. “Dear Prudence: Recession May Bring Return of Traditional Values,”

New York Times, October 21, 2008