The blog’s latest post for the Financial Times FT Data blog is published today.
January 1, 2013 8:00 am by Financial Times
By Paul Hodges
Chart 1: For the first time in history, most westerners now live beyond 55 years
January 1 2013 marks the 55th birthday of Mr and Ms Average Baby Boomer. When they were born in 1958 in the wealthy western world, nobody imagined they would grow up as part of the largest, wealthiest and most long-lived generation in history. Similarly today, few realise that their imminent entry into the 55-plus generation will have such profound consequences for the economy, for politics, for companies and all of us individually.
Their story since 1958 can be told via the aid of four key charts. The western baby boom itself began after the second world war and ended with the swinging sixties in 1970. In some countries, it came in a shorter and more concentrated form. In the US, for example, a remarkable 52 per cent more babies were born between 1946 to 1964 than in the previous 18 years. In addition, the dramatic increase in life expectancy since 1900 has created a totally new generation – the “new old” 55-plus, as chart 1 shows.
Chart 2: The boomers pushed interest rates to record levels
The early 1970s marked the start of the new boomers’ impact on the economy, as they began to join the wealth creator 25 to 54 age range. Consumer companies recognise this as being the period of peak spending, and the boomers’ arrival led to a sustained surge in demand, and high inflation. In turn, interest rates moved to record levels:
As chart 2 shows, US interest rates had averaged 3.5 per cent since 1900
* The surge in boomer demand helped them to average 7.3 per cent in the 1970s and 10.6 per cent in the 1980s
*They peaked at a record 14.6 per cent in 1982
Chart 3: P/E ratios soared during the boomer super cycle
However, 1983 saw the arrival of Mr and Mrs Average Baby Boomer in the wealth creator generation. This was very good news, as it marked the start of an unparalleled period of job creation, with 21 million jobs added between 1983 and 1993. Supply began to catch up with demand, and interest rates began to return to historical levels. It also signalled the start of a sustained period of economic expansion, as chart 3 shows:
* Previous economic cycles had typically lasted five years, with 12 to 18 months of recession
* But between 1983 and 2007, the US suffered just 17 months of recession in 25 years
* Not only were the boomers’ own children now growing up, but younger boomers were still joining the wealth creators
* This led to the phenomenon of ‘pent-up demand’, with any minor slowdown being immediately followed by a catch-up period
Stock markets thrilled to this new paradigm. Prof Robert Shiller’s 10 year Price/Earnings ratio had bottomed at 7.4 in 1982. It then never looked back till peaking at 42.5 in 2000, as markets and policymakers came to believe that non-inflationary constant growth was here to stay.
Chart 4: Household spending reduces as people join the New Old 55+
But nothing lasts forever. In 2001, the oldest boomers began to join the 55-plus generation, when household spending begins to decline quite rapidly. Spending typically peaks between the ages of 45 to 54, but slips to 92 per cent of this level between the ages of 55 to 64 as people then only need to buy replacement products rather than new items. It falls to just 67 per cent of peak spend after the age of 65.
Household consumption is 71 per cent of US GDP, and averages about 60 per cent in the rest of the west, so economic growth is now inevitably set to slow, especially as the following generation is 14 per cent smaller. Plus, of course, the boomers are uncomfortably aware that they now need to save more and spend less, to fund their extra decade of life expectancy compared with their parents.
As in 1983, this process may well move into overdrive as Mr and Ms Average Boomer join the “New Old” on 1 January. Demographics drive demand, after all, and the New Old already contain 29 per cent of the western population (272 million people). They are also the only cohort still in growth mode, with the UN Population Division forecasting their numbers will rise 34 percent by 2030.
Yet most investors, like most companies and policymakers, still seem largely unaware of the potential implications of this looming milestone for future asset market returns and corporate profits.
Paul Hodges is the co-author of Boom, Gloom and the New Normal: How the Western BabyBoomers are Changing Demand Patterns, Again