Most of us follow the same life cycle. We start out as children, then we become young single adults. We pass from student to working life, form couples, become parents, grands-parents and then retirees. At each of these stages, our financial behaviour evolves and adjusts to our needs of the moment. And when a large group of individuals undergoes these same shifts at the same time, the economy is affected. This is the case of certain generations that have brought about major changes in the global economy.
Generally speaking, says Fabien Benchetrit, senior portfolio manager at BNP Paribas, a generation is a sub-population whose members are more or less the same age or who have lived at the same time, and who thereby have had many common experiences. However, some experts take another approach to this and extend the baby-boom generation to persons born in the United States between 1935 and 1961, as seen in the graph below from the trough to peak.
Exhibit 1: This highlights the evolution of US births in millons
The baby-boom generation of 105 million individuals (not counting immigrants) according to the Census Bureau, had a major impact on the United States, which was unable to adjust supply to demand. For example, the job market was sluggish, with unemployment rising from 3.50% at end-1969 to 8.2% at end-1975. Likewise, the real-estate market underwent a boom until the 2000s, driven by all of those baby-boomers simultaneously buying property.
American families’ expenditures peak when the parents are on average 46 years old. In general, couples have their first child between 28 and 33. When their first child goes to university at age 18, parents’ expenses often spike, with tuition, room, board and related expenses. “The impact of baby-boomers’ heavier spending is visible in various economic indicators. The graph below highlights a close correlation between US equity market capitalisation (adjusted for the expansion in the Fed’s balance sheet) and baby-boomers that are 46 years old.” The expert writes in the company’s blog.
Exhibit 2: This graph shows how US births shifted and US market capitalisation occured
While demographics clearly affect the economy, there are other major factors involved, such as legislation, government policy, monetary policy, wars and geographical tensions, etc.
And, now, another generation that is just as important is emerging – millennials. Based on the same broad definition of a generation, millennials are individuals born in the US between 1976 and 2010 – a period of 34 years. So this generation of 136 million individuals (excluding immigrants) is actually larger than the baby-boom generation. This is also the first “digital” generation, i.e., born with the Internet. They trust social media more (e.g. Facebook, Tweeter, Instagram etc.) than they do companies. Their lives, in fact, revolve around social media.” Says Benchetrit.
“However, millennials’ impact on the economy is different from that seen with the baby-boomers. For one thing, they are a smaller portion of the population. While baby-boomers accounted for up to 57% of the US population US (in 1960), millennials made up 43% in 2014. In addition, they were born over a longer period than the baby-boomers were.” Says Benchetrit.
Millennials born before the first peak of births in 1990 have now completed their studies and started working. They are now numerous enough to affect the economy but conditions have not been in their favour. They arrived on the job market, carrying debt, in the midst of the subprime crisis in 2008. The US economy was resilient enough for them to find jobs, but those jobs were less well-paid and delayed their financial autonomy. In 2015, for the first time since 1960, 31.6% of young people aged 18 to 34 still lived with their parents.
Exhibit 3: This demonstrates the number of young adults (18-34 years of age) living with their parents
The behaviour of baby-boomers and millennials is having a clear impact on the economy. Nevertheless, financial markets are currently trading in a “demographic dip” between the baby-boomers, who are reducing their expenditure, and the millennials, who are not numerous enough to have reached their prime spending years.
“A better understanding of each of these generations’ behaviour will allow asset managers to create value, for example, by focusing on healthcare and pharmaceuticals as US baby-boomers get older.” He explains.
According to the blog, the managers could also try to identify new countries that have the same features as the United States at the start of the 1960s, i.e., those undergoing urbanisation and lightly indebted countries with economic growth similar to what the baby-boomers experienced and a population consisting of a high proportion of young, skilled workers who have put some money aside.
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