Investments

The Power of the Consumer

By Shane Barber

November 16, 2020

The Power of the Consumer

Catch The Power of the Consumer on America’s Wealth Management Show

Economic Drivers in the Next Administration

Today we’re going to spend some time talking about a subject near and dear to my heart, demographics. With demographics, I’ll illustrate to you the power of the American consumer. You might be wondering why I like demographics so much, and that would be a reasonable question to ask. My answer is this. Demographics are the closest thing we have to a crystal ball when predicting future trends in the economy. French philosopher Auguste Comte said, “Demography is destiny.” And demographer and writer Philip Longman says, “Demographics are the future that has already been written.” All we have to do is know how to read it. 

To be sure, demographics are almost worthless when it comes to short term predictions. You can’t pinpoint precisely WHEN a demographically indicated trend is going to commence. However, you can be sure that it WILL. 

Human Beings Are Predictable

You see, it turns out that we, as human beings, are very predictable creatures. In a specific order, we do certain things at certain ages, for universal reasons, at different stages in our lives. In every stage of our lives, one of the following is true. We are either causing someone else to consume products and services to support us or consumer products and services for ourselves and those dependent on us. 

We’ll explore these predictable stages in detail shortly. Before we do, there is a critical point here that I need you to understand. We are all consumers. We’re either consuming the fruits of our parent’s labor when we’re kids or the fruits of our labor once we’re grown, but we’re always consuming. And, in America at least, personal consumption is responsible for 70% of our economy. 70%! That’s huge! It stands to reason then that the more money people have at their disposal, and the more likely they are to spend those resources, the more robust our economy becomes. 

So, to understand how consumer spending will impact the economy, we need to understand how many people are in the economy, what ages they are, what people do at certain ages, and how many people are in each age group. We need demographics. Fortunately, there is no shortage of data on this front, and I’ll share much of it with you over the next several pages. 

The Typical American Consumer

Let’s begin with the lifecycle of the typical American consumer, and follow them from the cradle to the grave to see what they, or those supporting them before they become productive members of society, spend money on, and when. 

Remember, before we became consumers, we were economic drains on our parent’s resources. Kids are expensive. They cost everything and produce nothing, at least in a monetary sense. However, since children are the future, and cause lots of extra consumption, let’s start with the cost of raising them. Check this out:

Power of the Consumer - USDA Cost of Raising a Child

Figure 1 | Source: USDA

In a USDA report released on January 9, 2017, they estimated the cost of raising a child to the age of 17 is almost a quarter of a million dollars on average (in 2015 dollars). For some, the costs are much higher. And, that’s before college costs. So, a family with four children who all go to a public college for four years will spend $1.256 million on raising and educating them. If they all go to a private college, the family’s cost will be $1.66 million. 

Those are pretty staggering numbers. If I had known this 33 years ago, I might have given this whole raising kids thing another thought. I’m kidding, of course. But the fact remains that kids are expensive. It’s worth noting here that the second-highest expense where children are concerned is food. The cost to feed a child is second only to the cost to provide a roof over their head. As those of you who have children know, those food costs get progressively higher as teenagers seemingly develop hollow legs, down which they put the entire contents of the refrigerator and the pantry. They’re voracious eaters!

Estimated Cost of a Child

The next table comes from the same study and shows the estimated cost for a child born in 2015 and reaching age 17 in 2032 by low, middle, and high-income groups. Note that for the higher income group, the total expenses to raise that child to age 17 is far higher than the average of $233,610, reaching almost a half-million at $454,770. 

Power of the Consumer - USDA Future Estimated Annual Child Expense

Figure 2 | Source: USDA


The Power of the Consumer
on America’s Wealth Management Show

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The Power of the Consumer

Links Mentioned on this Episode

Complimentary Consultation

Dean Barber: Thank’s so much for joining us here on America’s Wealth Management Show. I’m your host Dean Barber along with Bud Kasper, and I have some great news for all our listeners

Bud Kasper: Dean, they’re waiting.

Dean Barber: Okay. Well, the next savior of the American economy is not Joe Biden.

Bud Kasper: No.

Dean Barber: Not Nancy Pelosi. 

Bud Kasper: No.

Dean Barber: Not Alexandria Ocasio-Cortez.

Bud Kasper: Okay. 

Dean Barber: It is the millennial generation, Bud.

Bud Kasper: The millennials.

Dean Barber: The millennial generation.

Bud Kasper: The ones living in the basement of their homes? Of their parent’s homes.

The Millennial Generation Will Drive the Next Economic Boom

Dean Barber: The millennial generation will be the driver of the next economic boom, which could rival the economic boom that we saw from the mid-’80s through the ’90s, all the way up to the tech bubble of 2000.

Bud Kasper: Interesting.

Dean Barber: Yeah.

Bud Kasper: Yeah.

Dean Barber: So that’s all we need. Everybody go home and relax and don’t worry about anything because the millennials are going to save everything.

Bud Kasper: That’s right.

Dean Barber: And I know that some of you have almost driven off the road. You keep saying, “Okay, I can’t listen to this crap.”

Bud Kasper: Boy, what have they been drinking?

Dean Barber: All right. So, what we’re going to talk about today is the power of the consumer. I want you to pay close attention to this, and I encourage you to read an excellent article that my brother, Shane, wrote. It’s called The Power of the Consumer: Economic Drivers in the Next Administration. Let’s focus on the first part of that, The Power of the Consumer, find it, read it, study it. 

It’s critical to the next decade of your life as it relates to the economy, changes in the economy, and changes in the markets, et cetera.

Demographics and Consumer Trends

For several years, Bud, you and I studied with a gentleman by the name of Harry Dent.

Bud Kasper: Right.

Dean Barber: All right. Now, Harry, if you think about Harry as an economic forecasting type person, man, he tried to do some short-term stuff. Still, short-term forecasting for the economy is very difficult. Right?

Bud Kasper: Right.

Dean Barber: But one thing that he did right and taught us well over the years that we studied with him is that what the consumer does drives the economy. 

Bud Kasper: Yes.

Consumer Spending is 70% of GDP

Dean Barber: 70% of our total economic output called our GDP. Gross domestic product is consumer spending. So how the consumer spends, what they buy, and when they buy it, will dictate how the economy goes. The government wants you to believe that it’s all about them. They only make up 15% of our total GDP. Corporate spending makes up another 15% of our GDP. 

But the consumer, you and I, all our listeners, are 70% of our total gross domestic product. That’s huge. So, now what do we have to do? Let’s understand what demographic trends are. When do we do certain things? Because by and large, we all do them together. 

Bud Kasper: Exactly right, Dean. Harry is a fascinating guy. He’s the head of Dent Research; he’s a demographer. What that means is he looks at population waves in a lot more detail than we’re going to describe today to see if he can format how this will impact stock markets, housing markets, and many different economic factors associated with it. And I have to say that he’s excellent at the longer- term. The short-term, not so good.

The Millennial Generation is Bigger than the Boomer Generation

Dean Barber: Right. Well, let’s give an example, Bud. So, one of the things that Shane writes about in this article is the cost of raising a child. So, let’s think about the millennial generation. Seventy-eight million people in the United States, in the millennial generation, compares to 76 million baby boomers.

 The millennials have done something different, though, Bud, then what the baby boomers did. The millennials have waited longer to start forming families. 

Bud Kasper: Yeah, and a lot of that’s very logical. A lot of it is student loans.

Millennials Will Eventually Get Married and Have Kids

Dean Barber: Could be student loans, could be just that they watched their parents struggle at a young age, and they say, “You know what? I’m going to enjoy myself. I’m going to do some things differently.” 

But eventually, this millennial generation is getting married. They are having babies, buying houses, and then all the things that go along with it. We’re going to cover a lot of that, but I want to stick just with having babies first.

Bud Kasper: Okay.

Dean Barber: Okay?

Bud Kasper: Which we happen to be experts at.

Average Cost to Raise a Child

Dean Barber: So, from the USDA, the estimated cost of raising a child on average is about $284,000 per child. 

Bud Kasper: Right.

Dean Barber: That takes them from birth up to college. This does not include a college education.

Bud Kasper: Mm-hmm (affirmative).

Dean Barber: The high end of this is $454,000 to raise a child; the low end of this is $212,000 to raise a child. If we have the millennial generation at the beginning of having kids and will start having kids en masse, what does that do to that massive part of the population, 78 million people? What does it do? It causes them to spend more money, and it’s not on themselves; it’s now on raising children.

Bud Kasper: It’s them. Yeah.

Dean Barber: Right.

Bud Kasper: It is. And of course, these are fundamental things, diapers, talcum powder. Do people use talcum powder?

Dean Barber: Of course they do, yeah. You’ve got grandkids, Bud; you know this.

Raising Kids is an Economic Generator

Bud Kasper: All those kinds of things. Those are economic generators, okay? The demand created by a population that is now birthing creates a lot of economic opportunity in many areas of the economy.

Dean Barber: It creates a lot of economic opportunities. The thing that you should be asking yourself is, what are those opportunities? Could we be going into a decade of expansion that could rival the one we saw during the ’90s? That was in the era when baby boomers were getting those kids going, right? 

And the hospitals were full, and all the other things were going on. They were buying strollers, diapers, and all the things that go along with raising kids. Could we be going into that again? If so, have you positioned the right way to take advantage of that? 

Dean Barber: I want you to read the article, The Power of the Consumer, and then right there on the website; there’s a button that you can click for a complimentary consultation. We’d love to talk to you about what you’ve got going on and how we can help you. 

You, the Consumer, has the Power

Dean Barber: The consumer has the power. That’s you, that’s me. That’s everybody listening to this program today: your neighbors, your friends, your relatives, your coworkers. The consumer controls the economy. We are the 800-pound gorilla in the corner. As the consumer goes, so goes the economy. 

Why do I say that? Because consumer spending is 70% of our gross domestic product. 15% is government spending, and the other 15% is corporate spending. And now, those 15% might be 14%, 16%; sometimes they might be 13%, 17% sometimes, but generally that 30% is government and business spending. So to understand the power of the consumer, I want to talk about an American icon.

Bud Kasper: Okay.

A Deeper Look at Harley Davidson

Dean Barber: The Harley Davidson motorcycle. Okay?

Bud Kasper: The status of retirement.

Dean Barber: Right. Well, so if you look at the demographics of what age most people buy a Harley Davidson, it’s age 45. Age 45 is generally the age when people say, “I’m going to get myself a Harley Davidson.”

Bud Kasper: Yeah. Before I get too old to be able to hold it up, I want it.

Dean Barber: Right.

Bud Kasper: I’ll get it now.

Dean Barber: And I can afford it. My kids are getting older. I’ve got a little bit of free time.

Bud Kasper: Yep.

Dean Barber: Age 45. So think about this. And if we think about this, if we look back to the millennial generation, Bud. From 1990 to 2006, Harley Davidson stock was $1.78 a share in January of 1990 and peaked in July of 2006 at $70 a share. 

Bud Kasper: Wow.

Dean Barber: Okay?

Bud Kasper: Wow, that’s exciting.

Harley Stock Took Off But Came Back Down

Dean Barber: Let’s call it $2 to $70. Okay? That is a massive increase in the price of Harley Davidson stock. If you look from July of 2006, and then you go to October of 2008, we still hadn’t seen the worst of the market’s downturn. Harley Davidson stock was back down to $13.39. So it went from $70 to $13.39. When you ask yourself the question, what happened? If you subtract 45 from 2006, you get 1961. 1961 was the peak year of births for the baby boom generation. 

In other words, there were more children born in 1961 than in any other year in history. So it would make sense that in 2006, we had more 45-year-olds in our country than ever before. Who’s buying the Harley Davidson motorcycles? The 45-year-olds. And then what happens is the number of 45-year-olds begins to decline. And if we look at Harley Davidson from 2006 through today, Harley Davidson stock is down 9% total return from 2006.

Bud Kasper: Unbelievable.

The Demographic Trends of Harley Davidson

Dean Barber: Unbelievable is right. Why is that? Well, we’re looking at a demographic trend. Who buys that motorcycle? That’s why when we started talking about this, I said the millennial generation is going to be the savior of our economy over the next decade. Why? Because they’re getting married, Bud. And when they get married, what are they going to do? They’re going to buy houses, they’re going to have babies, and they’re going to spend like crazy.

Bud Kasper: Yeah. And there’s always a cause and effect associated with it because, Dean, you got to remember all the poor biker clubs that have gone out of existence? It used to be you would go into Sturgis if you were a biker all your life, and now, here comes my mother and father on a motorcycle. So somebody is killing the party here.

Dean Barber: Yeah, yeah. Yeah.

Consumers Make Waves in the Economy

Bud Kasper: I want our audience to think of the waves because we talk in demographics about the waves that are going on. It is a classic demonstration here that Shane put in his paper, which is just an outstanding read, folks. And you need to take Dean’s advice and get on the site and be able to read this.

Dean Barber: Right, of course. The paper we’re talking about is one that my brother Shane wrote. It’s called The Power of the Consumer, and there is a lot of detail in this article. It isn’t a quick two or three-minute read. Sit down and read it. 

If you’d like to talk to us about making sure that you’re positioned correctly for what I believe will be the next boom in the economy, linked to the millennial generation, click on the button that says complimentary consultation. We can get with you through a virtual meeting, in-person, or via telephone.

“I never thought there would be a more massive generation than the boomers.” – Bud Kasper 

Bud Kasper: Yeah. You know, the most obvious impact that the millennials are having, and I never would have believed, I don’t know why, but I never thought there would be a more massive generation than the boomers. 

But now we have, by 2 million more, we have the millennials. And again, they were a little slow to get started, and that is explainable. The gosh darn cost of education is so disruptive to the students that the parents are trying to fund their students, which is postponing their retirement somewhat. 

Millennials are Buying Homes in Great Numbers

As millennials get into their late twenties, early thirties, now the formation of their families is starting to occur, and we repeat what we saw in the big wave because of the boomers. Now, they’re going to be wanting houses instead of apartments or the basements of their parents’ house. Many people who ended up there didn’t want to be there, but they saved some money. 

Now that money is going to come back into the economy, which will be positive. And when you look at houses, and every person listening to my voice right now understands that. You’ve seen this. You’ve seen people going out, and within the initial opening of a sale of a house, all of a sudden, you’ve got six bids. And, of course, some of these bids are cash, and those offers are the ones that are winning. It’s just an amazing phenomenon. But again, it all comes back to demographics. And that’s what we’re talking about today.

Dean Barber: Well, if you look at just the homes purchased today, there are some pretty impressive statistics in this article. And if you look at the home buyer’s age, 38% of the homes purchased today are being purchased by the millennial generation, from age 27 to 34.

Bud Kasper: That’s correct. 

Dean Barber: Okay?

Bud Kasper: Right.

Dean Barber: That’s where 38% of the homes are being purchased. 

Japan and Demographics

Bud Kasper: Yeah. Now think about this, because they just got their loans paid off, and now they’re going in and getting a mortgage, but that’s constructive. And again, let’s use the example that Harry Dent used to use all the time, Japan. When the war was over, World War II and our boys came home-

Dean Barber: They made babies. They had to rebuild their country.

Bud Kasper: And so, now we’re going into the fifties and sixties, and we’re starting to see housing in demand, just like it is today. 

Dean Barber: Right.

Bud Kasper: A lot of parallels to what we’re talking about. And that’s why demographics are real. Now, to what extent does it impact the rest of the important things in our lives? Such as the stock market and the economy at large? That is related to what’s happening with these demographic waves.

Family Formation & Buying Homes

Dean Barber: While we see this positive from the millennial generation entering their family formation years and buying houses and having babies, there is an opposite effect of this on the baby boom generation. And even the Gen X-ers who are getting ready to, or are already in retirement. And the negative here is twofold. 

It’s inflation, and it’s higher interest rates, all right? So you might say, “Well, why would higher interest rates be a bad thing?” First of all, Bud, you and I have seen people come in and talk to us from all parts of the country. And they have had people in our profession projecting financial plans for them, projecting retirement plans for them, and using inflation rates of 2% to 2.5%. It’s what we’ve seen over the last 20 years. Why would it be any different?

Well, as this millennial generation gets out there and they get into their peak spending years, you’re going to see inflation come back, especially with the deficits that we have today. That inflation, if you’re not forecasting 4% or better inflation for your retirement, I think you’re going to wake up, and you’re going to say, “Man, I wish I would have forecasted a higher rate of inflation.” 

If interest rates rise, a lot of retirees are counting on bonds today to produce income. If interest rates rise, we talked about this last week on the show; it’s a teeter-totter effect. If the interest rates go up, then what happens to bond values? They go down. Look, you need to prepare for this next wave of demographics. And you need to understand how it impacts your ability to retire successfully and to stay retired successfully.

How the Consumer Spends Controls Where Money Flows

Dean Barber: We’re talking about the power of the consumer and how the consumer controls 70% of our gross domestic product. What you and I spend is 70% of our GDP, Bud. That’s huge.

Bud Kasper: And by the way, that’s not a current number. That’s the percentage which has been used for a long time.

Dean Barber: A long, long time. And it just is what it is.

Bud Kasper: And it’s validated every year.

Dean Barber: Yeah. So how the consumer spends and what they spend money on controls where money flows. It controls supply and demand. It controls everything. Okay?

We’ve seen it happen. I gave the example of Harley Davidson above. But now, I want to talk about this millennial generation and the millennial generation getting married. Now, this is big business.

Bud Kasper: You bet.

Barn Weddings are Big Business

Dean Barber: You alluded to barn weddings.

Bud Kasper: Yeah.

Dean Barber: Okay. That’s a big deal right now. The venues where these millennials want to have receptions and things like that are different, but it is catching on, and it’s big-time money for the people in these businesses. Let’s talk about wedding barns.

Bud Kasper: My wife and I went to a wedding, just, I think it was probably two years ago and everything. It was quaint and well done. I mean, these barns have been, of course, what do I want to say, electrified.

Dean Barber: They’re modern inside. They look great.

Bud Kasper: Wooden floors, not dirt, and it was wonderful. It was very nice.

No Less than 20 Barn Venues in the KC Area

Dean Barber: My niece got married in a barn, and you think, “Ah, I got married in a barn.” There’s that old story, “What? Were you born in a barn, kid?” “I was married in a barn.”

Here’s the thing, so just in the greater Kansas city area, we did a little Google Map search of wedding barns. No less than 20 wedding barns in the area, and to get a wedding in those barns, guess what you have? A waiting list.

Bud Kasper: A waiting list. Not a wedding list, a waiting list.

Dean Barber: They’re having three events, no less than three events, each weekend at an average cost of maybe $5,000 per event?

Bud Kasper: That’s $15,000 a week.

Don’t Forget the Vendors

Dean Barber: If they have events every week for 12 months out of the year, that barn, just for the event, is $750,000 a year in revenue. And you know what that doesn’t include?

Bud Kasper: What?

Dean Barber: The drinks, the food, the catering.

Bud Kasper: Right.

Dean Barber: Now, remember the millennial generation is slightly larger than the baby boom generation. They’re getting married, and as they’re getting married, they’re spending money. That’s just the beginning because what happens after you get married, Bud?

Bud Kasper: Children.

Dean Barber: Yeah.

More Millennials are Buying Homes than Any Other Generation

Bud Kasper: If you look at housing and according to the National Association of Realtors, they said the age people are buying houses is 22 to 39. I think it’s later than that. I think it’s like 26 to 39 or something like that.

Dean Barber: Many younger millennials are now buying homes early, and why they’re doing it now, and they weren’t doing it ten years ago because you got that 30-year mortgage rate down at what, 2.5%?

Bud Kasper: Yeah, an incredible time to do it.

Dean Barber: I mean, you’re crazy to rent right now.

Bud Kasper: What if you were getting married back in the Jimmy Carter era? 14%?

Dean Barber: You remember that, don’t you?

Bud Kasper: I do. What’s the highest mortgage rate you ever had? I think it was about 8.3%, something like that for me.

Dean Barber: I remember my first mortgage was somewhere in the mid-sevens, so we weren’t too far apart there.

Bud Kasper: Yeah. And at the time, quite frankly, I hadn’t even heard of refinancing. I thought this was a commitment, and as soon as I found out about that, I put myself on a whole new track.

Understanding Consumer Spending Patterns Can Help Us Understand the Economy

Dean Barber: So the consumer’s driving the economy. So understanding where the consumer is in their spending patterns, in their life, and how many people are in those age groups can help us understand what areas of the economy stand to do the best. Understanding this and applying it to your financial situation is critical. 

Request a complimentary consultation. We need to talk to you about your plans, what you’re trying to do, and that you’re all set for this next wave of spending coming from the millennial generation. 

The Inflation Monster

Believe it or not, many people have made fun of the millennials, and some of them for good reason, but they will mature, get married, have children, buy homes, and that will fuel the economy. Now there are some negatives to this, and we talked about it. It’s inflation, Bud. It’s a huge deal.

Bud Kasper: The greatest eroder of wealth.

Dean Barber: So let’s talk about inflation more, Bud, because I think this is critical.

Bud Kasper: Well, first off, I think some people are saying, “Well, why are you telling us this stuff about Harley Davidsons and barns and all that?” And the answer is because it’s vital to the growth of the economy, and we all win when there’s good, broad-based economic growth. This is the wave, and it has happened time and time again. 

Embrace the Millennial Economy, but Plan for Inflation to Rise

These are what we call demographic waves, and now we’re riding this new wave, if you will, Beach Boys would love that, where this new demographic wave with the millennials coming in, we should embrace it. My biggest concern that I have, though, going back to what you said here, the greatest eroder of wealth is inflation. Our national debt is out of sight. Okay. We have issues associated with it. You know the Federal Reserve and Chairman Jerome Powell has stated the Federal Reserve is targeting an inflation rate of 2%.

As a financial planner, my biggest concern is that if that inflation rate keeps going up, it will impact our planning. Therefore, we have to understand how we could be affected by it. More importantly, we need to have our government officials to understand that we can’t keep this spending up. 

Stimulus and Inflation

Now you might say, “We’re in this COVID-19 thing. We haven’t had a second wave of stimulus. Do we need to do it?” The Federal Reserve is saying, “Do it. We need it at this particular point.” So sometimes you have to have sacrifice a higher degree of stimulus, which could be inflationary. Still, it’s better than having an economy that’s going to fall because we’re sheltered. We’re doing the right thing, from that perspective.

There’s no argument associated with that. And God bless us for having intelligent people and companies that can serve great these vaccines that will hopefully take us out of this issue, and it couldn’t come any sooner. But the reality is that these are issues that we have to face and understand, and therefore, that’s how we can end up winning.

Understand the Companies Impacted by Economic Boom

Dean Barber: I agree. So let’s follow the money, right? So go back to the weddings, dresses, flowers, photography, tuxedos, catering, music, transportation, lodging, alcohol, the list goes on and on and on. The economic impact, just from the wedding industry, is a $55 billion industry, and when you’ve got this wave of millennials, pay attention to this stuff. Right?

Bud Kasper: Right.

Dean Barber: Understand the companies behind it, and how do you invest in those? How do you make sure that you’re riding that same wave? On the houses, Bud, what are we talking about? We’re talking about lumber, rebar, and all kinds of appliances, furniture, all the things that come along with the first time home purchase.

Bud Kasper: Exactly, yeah.

Dean Barber: Who are the companies that manufacture those particular items?

Millennial Quality of Life

Bud Kasper: One of the difficulties is, is that the millennials, as a little bit different from the boomers, that have had a good life. They’ve lived with parents with two incomes, and therefore, they had a good lifestyle. They want that lifestyle.

Dean Barber: They do. And it’s more than just Amazon and Apple and Google, right?

Bud Kasper: Yeah.

Dean Barber: The manufacturing part of the economy is a big deal as well. So don’t just get one-sided here. Make sure that you’re prepared. Request the same thing, complimentary consultation.

My Generation

Bud, what year did the song “My Generation” come out?

Bud Kasper: Oh, gosh, I have no idea.

Dean Barber: That had to be back in your heyday.

Bud Kasper: Well, so what am I supposed to do, quantify my heyday? This is a trick question, folks. He’s looking for disclosure.

Dean Barber: You don’t remember what year that came out?

Bud Kasper: No, I’d say ’79, ’80?

Dean Barber: Do you think it was that late?

Bud Kasper: I kind of do. The Who? What do I know?

Dean Barber: I was just curious. I thought you might know. It was released in 1965.

Bud Kasper: Is that when it was?

Dean Barber: Yeah.

Bud Kasper: Oh, no. Is that right?

Dean Barber: Yeah. 1965. Remember, what generation was that?

Bud Kasper: Boomers.

Dean Barber: Yeah.

Bud Kasper: Yeah, of course. 

Dean Barber: Yeah. It was The Who. 

I thought that was interesting because we’re talking about the power of the consumer today. We’re talking about demographic trends, and we’re talking about different segments of the population and what age you spend what amount of money on what item. 

Potato Chips and Demographic Trends

It’s interesting. You can break this down, and you could tell the average age of the people in the houses in a neighborhood if you just were dropped into a grocery store. Say you get blindfolded, and you go into a grocery store and go down the potato chip aisle. Okay? 

Bud Kasper: Okay. 

Dean Barber: If all you had to do that was the only way you were going to decipher the average age of the households in the neighborhood that was to go down the potato chip aisle, you’d be able to identify it pretty easily. 

Here’s what I mean. If you have an average household age from say 38 to 45, you’re going to have two sides. Both sides of the whole aisle are going to be full of potato chips. Why? Because kids eat potato chips, a ton of potato chips, and all the things like potato chips. You get to a neighborhood where the average age is 60-plus, you might find a half of one side of that aisle that’s potato chips. Because as you getting older, you’re just not eating those potato chips. It’s the kids that eat them, right? 

Bud Kasper: Sure. Yeah.

Demographic Trends Shed Light on Potential Economic Performance

Dean Barber: It’s demographic trends. It’s when people spend on what. Now, you must understand this from a broader perspective of more significant purchases like we’ve been talking about, the weddings. We’ve been talking about buying homes and the things that go along with buying houses, appliances, and all the things that raise kids. It’s huge.

Bud Kasper: No doubt. And it’s factual. This isn’t something that’s brand new that we’re bringing to you. Demographic studies have been around for a century and different things. I mean, you can go back to Europe and see the waves that were occurring over there and how they impacted us. 

Do you know what it is? It’s a blueprint. So let’s use an example, Japan. We talk about them having a difficult time. My golly, their stock market has struggled for years. So the question is, “Will they ever come out of this?” And the answer is, “Only when the demographics change.” 

Dean Barber: Right. You have to have kids.

To Have Babies, or Not to Have Babies, that is the Economy’s Question

Bud Kasper: Yeah. You have to have kids. And then you go over, and you look at China, and what were they doing years ago? Weren’t they slaughtering babies, mostly girls, because they didn’t want to have more reproduction. 

Dean Barber: They’re trying to do population control. The flip side of that has been Europe. I was at a conference here a few years ago, and I thought it was kind of funny because they were showing some of the commercials that they’re playing over in Europe. 

The commercials were all about, “Go on vacation and have sex!” Okay. Literally, it was saying, “Go out, go on vacation, have sex, and have babies.” They know that they have a problem with their population, and if they don’t start having babies, they’re not going to have that next generation to help support the retirement systems of the retiring people.

Bud Kasper: Right. Or the economy in general.

Dean Barber: Exactly right. 

Bud Kasper: So that doesn’t surprise me, but I want to keep the show clean.

Dean Barber: Well, that was a clean commercial. It was just encouraging people to have kids. 

Bud Kasper: They’re a little bit more on the wild side over there. 

Income in Retirement

Dean Barber: All right. So now, let’s talk about income. When they say when you retire that you should plan on 60% of your pre-retirement income as your base. Now, I think that that’s the most stupid thing that you should say. “Oh, yeah. When you retire, you’re going to need 60% of what you’ve made while you were working.” 

Come on. You’re going to need whatever you need. That’s part of planning. You got to imagine the life that you want to have, and you got to figure out what that’s going to cost, and that’s how you put your plan together. Okay?

Median Household Incomes in Peak Earning Years

You don’t do it based on an average. But here’s the interesting thing. If you take the peak earning years here and look at what people are making from 45 to 54, we’re up to a median household income of about $92,000 a year right now. 

Bud Kasper: Okay.

Dean Barber: Okay. That’s the median household income of that age group, 45 to 54.

Bud Kasper: I’m assuming that’s a dual-income?

Dean Barber: Yep. 65 or older is now down to about $47,000. 

Bud Kasper: Well, that makes sense to me.

Dean Barber: But that’s not 60% of $92,000.

Bud Kasper: No.

Dean Barber: It’s less, right?

Bud Kasper: Yeah.

Dean Barber: It’s less. So, why do you think people are so concerned about Social Security and cuts to Social Security, Bud? Why do you think the people in their retirement years are so concerned about these ultra-low interest rates, and they can’t get any earnings on their CDs, and they have to take risks with their money, right?

Bud Kasper: Yeah.

Higher Interest Rates Yield Higher Inflation

Dean Barber: It’s a double-edged sword. 

Bud Kasper: It is a double-edged sword. That’s my thoughts as well. Because once you want the higher interest rates, how do you get higher interest rates? 

Dean Barber: High inflation. Right.

Bud Kasper: Inflation. Right.

Dean Barber: What happens if we have higher inflation? Well, then this stuff costs more.

Bud Kasper: More. Right. So exactly right. But I think it’s job security for us.

Dean Barber: Right. Well, and the reason why we created our Guided Retirement System™ is precisely to say, “What are all the things going on around us?”

Bud Kasper: “Don’t ignore it.” 

Understand the Power of the Consumer and Plan Ahead

Dean Barber: Right. “How do we put a plan together that can take into consideration all of the different changes and things that are going to happen during our lives during our retirement years? How do we know that we’re always on track?” That’s our Guided Retirement System™. I want you to do two things. I want you to get to our website, and I want you to get this article called The Power of The Consumer. 

It’s what Bud and I have been talking about all day today. And then I was hoping you could request a complimentary consultation so that we can speak to you about how our Guided Retirement System™ could make this all crystal clear to you so that your plan takes advantage of what lies ahead. 

We Have the Power of the Consumer, Not the Government

Dean Barber: Exactly right. Bud, you and I have been following these demographic trends. Shane’s been following these demographic trends. That’s why when people were so worried about the election, and I know people are tired of talking about it, my comment was, “I’m not worried about who’s going to sit in the White House.” I care because I’m American. Right?

Bud Kasper: Right.

Dean Barber: But that’s not going to be what’s going to drive our economy. Because at the end of the day, government spending is only 15% of our GDP. The consumer, the 800-pound gorilla in the corner, you and I, it’s all of our listeners across the country, and it’s what we do and how we spend. 

We are predictable, as humans, and we do certain things at certain ages, and it’s like clockwork. If you follow the people who are doing those things and spend the money, it makes life a lot simpler.

Bud Kasper: Of course, the double-edged sword of that is if the government does come in and raise the taxes, then we have less money to put in the economy, and that’s where we have the differences.

The SECURE Act is Another Thing

Dean Barber: But if the consumer spends more than they’re earning more, guess what happens? Automatically, the proceeds… By the way, there’s more money coming to the government anyway due to the SECURE Act. You’ll find the SECURE Act. We did a whole video on that. It’s the biggest money grab I’ve ever seen. 

That’s going to get paid off, and it’s going to be by the baby boomers dying, passing money to the children in their peak earning years, and forcing that money out of their IRAs. We don’t have time to go into that. We’ll do that another time. Thanks for joining us on America’s Wealth Management Show. I’m Dean Barber, along with Bud Kasper. Everybody stay healthy and stay safe. We’ll be back with you next week.

 


The Consumer Wave

Now let’s look at the stages of life that we typically go through once we have moved out of our parents’ houses and become productive members of society. From ages 18 through 22 were generally single. Between the ages of 22 and 30, or when we typically get married, followed by having young families. That occurs between the ages of 31 and 45. Between 46 and 50, we are raising our families and paying for college for our children. Beyond the age of 50, we become the infamous empty-nesters, and then sometime after age 60, we retire. 

The way we spend money over these years of our lives looks very much like a wave. Early on in the wave, we’re not spending much money because we’re not making much money. However, as we get older, start making more money getting married, having children, buying homes, and all of the things we do with families are spending grows and peaks somewhere between 46 and 54. The peak in actual spending age is a function of household income. The higher the household income, the later spending tends to peak. At that point, the wave crests and begins to go downhill. We’re still spending money, but we spend it on different things as we age, and later in life, we’re spending money on things we’d rather not.

Check out the chart below: 

Power of the Consumer - Adult Spending Wave

Figure 3

The Parts of a Wave

Armed with this knowledge, we need to know how many people there are in the country in specific age groups. We can begin to see how they may affect the economy and what segments of the economy might do better or worse, depending on the size of the demographic wave that is moving toward it or through it. 

As any of you who spend any time on the water know, waves are powerful! So powerful, in fact, that there are entire classes on the behavior and power of waves designed to help mariners better understand the conditions in which they’re operating. And to safely navigate through most any situation they find themselves in. 

There’s an entire vocabulary dedicated specifically to the individual parts of a wave. There’s the wavelength, the wave height, the wave trough, the wave crest, and the wave amplitude for the basics. They all affect how you might navigate in waters exhibiting certain characteristics safely and successfully. 

Power of the Consumer - Parts of a Wave

Figure 4

Figure 5 | Source: Pew Research

Birth Waves

Looking at the two charts above, next to each other, you can see that there are very identifiable waves in the number of births each year over time. These birth “waves” have the same immense power as the liquid kind, and understanding their behavior can help us navigate safely and successfully. The power of these waves is undeniable, so let’s take a closer look. 

For the last 10 to 20 years, all the talk about demographic waves was focused on the Baby Boom generation, and for good reason. It was the largest generation in American history and has fundamentally changed everything it touched. And that is still mostly true today—all except the part about being the largest generation in American history.

The Biggest Generation – It’s Not the Boomers

Pew Research has some great demographic information. The following is from their website.

Millennials have surpassed Baby Boomers as the nation’s largest living adult generation, according to population estimates from the U.S. Census Bureau. As of July 1, 2019 (the latest date for which population estimates are available), Millennials, whom we define as ages 23 to 38 in 2019, numbered 72.1 million, and Boomers (ages 55 to 73) numbered 71.6 million. Generation X (ages 39 to 54) numbered 65.2 million and is projected to pass the Boomers in population by 2028.

The Millennial generation continues to grow as young immigrants expand its ranks. Boomers – whose generation was defined by the boom in U.S. births following World War II – are aging and their numbers shrinking in size as the number of deaths among them exceeds the number of older immigrants arriving in the country.

Millennials
  • With immigration adding more numbers to this group than any other, the Millennial population is projected to peak in 2033, at 74.9 million. Thereafter, the oldest Millennial will be at least 52 years of age and mortality is projected to outweigh net immigration. By 2050 there will be a projected 72.2 million Millennials.
Generation X
  • For a few more years, Gen Xers are projected to remain the “middle child” of generations – caught between two larger generations, the Millennials and the Boomers. Gen Xers were born during a period when Americans were having fewer children than in later decades. When Gen Xers were born, births averaged around 3.4 million per year, compared with the 3.9 million annual rate from 1981 to 1996 when the Millennials were born.
  • Gen Xers are projected to outnumber Boomers in 2028, when there will be 63.9 million Gen Xers and 62.9 million Boomers. The Census Bureau estimates that the Gen X population peaked at 65.6 million in 2015.
Baby Boomers
  • Baby Boomers have always had an outsize presence compared with other generations. They peaked at 78.8 million in 1999 and remained the largest living adult generation until 2019.
  • By midcentury, the Boomer population is projected to dwindle to 16.2 million.

High Numbers for the Long-Term

So we have two huge waves, sandwiched between two troughs, demographically speaking. The silent generation is gradually shrinking away, the boomers are still quite strong, Gen-X is a numerical trough in births, and the Millennials, whom I refer to as “Echo Boomers” because they are in large part the children of Baby Boomers, have become the largest wave yet to hit our economy. The effect of that wave is going to be big! As big as the effect the Baby Boomers have had over the last 40 years. Look at the next chart. Their numbers are going to persist at high levels for the foreseeable future. 

Figure 6 | Source: Pew Research

Harleys and Demographic Consumer Trends

To give you an idea of how strong these demographic waves are, check out this chart of Harley Davidson stock (HOG) over the last 15 years. You may remember from the spending wave that the peak in motorcycle purchases is generally around the age of 45. Note that HOG peaked back in late 2006, well before the financial crisis hit in 2008. If you subtract the average age of peak motorcycle purchases from the date of the peak in the stock, you wind up with 1961. 

That happens to be the peak year for births in the Baby Boom. Then there was another peak in 2014, some eight years later. That math takes us back to 1969, which is the highest year for births in Gen-X. Co-incidence? I think not. Using the demographic information about the Echo Boomers, we can extrapolate that the next peak in HOG will likely occur in or around the year 2035, 45 years after the peak in births of Millennials in 1990. That is IF Harleys are still cool to buy then. I sure hope they are!

Figure 7

Let’s Get Married!

But we needn’t look only at history to figure out what’s going on and what will happen. The Millennials have, for understandable reasons, tended to delay their family formation years by several years. Historically people got married and started their families in their early to mid-20s, with babies following shortly thereafter. The Echo Boomers are now getting married at around the age of 30. And it’s BIG business! 

Barns Are Big Wedding Business Too

Many of you know that not only are they getting married, but they also want to get married in a barn, a lovely barn, but a barn nonetheless. This has been a growing business over the last several years and will continue to be for quite some time. I know several people building barns for that very purpose as we speak, even though it would seem to be a saturated market. I Googled wedding barns near me, and this is a screenshot of what popped up. 

Figure 8

No less than 20 wedding barns in this area, and you have to be on a waiting list to get into any one of them! One of the people I know who have a venue like this (my son and daughter in law got married there) has no less than three events every weekend, at an average cost of over $5,000 per event. If they have events every week, for 12 months out of the year, that’s a staggering $750,000 in revenue for ONE venue! If you have a barn and you want to turn it into a cash cow, this might be the way to go. 

And this is just scratching the surface of the money being spent by this generation at weddings. Think of all the ancillary things that go along with the wedding: Dresses, flowers, photography, tuxedos, catering, music, transportation, lodging, alcohol, etc. The economic impact is vast and provides a ton of opportunities for people in any of those fields. IBISWorld estimates that the U.S. wedding industry is worth $55 billion. 

The Power of Consumer Suburban Migration

So, what happens after the wedding? I mean other than the honeymoon. Well, kids come along; and suddenly, that apartment doesn’t seem like the place you want to be anymore. We all recognize the younger generation’s propensity to gravitate toward the Urban core as revitalization projects, like the Power and Light District here in Kansas City, have popped up all across the country with the promise of a good time.

Ten years ago, the oldest Millennials would hang out at a place like the Power and Light District until all hours of the night, go to work the next day, and do it all again. Many of them had apartments close to a place like that so they could always be in the middle of the action. It’s like they had a massive case of FOMO (fear of missing out). Today, they’re leaving work and going home and raising their children, having left the apartment and the accompanying lifestyle behind.

The Millennials’ largest segment is now beginning to do exactly the same thing, and it’s showing up in the real estate market nationwide. Take a look at the charts below from the National Association of Realtors. They are quite telling. 38% of all home buyers are between the ages of 22 and 39. That’s almost exclusively the Millennials, considering that they are today between 24 and 39. 

Figure 9 | Source: National Association of Realtors

Power of the Consumers - NAR Age of Buyers

Figure 10 | Source: National Association of Realtors

Older Millennials Are Buying Homes

It’s no surprise that the overwhelming majority of Home Buyers in the 30-39 age group are married couples. Remember, they’ve had their fun, now they’re having babies, and baby’s stuff takes up a LOT of room. And it’s interesting to note that 50% of those buyers aged 22-29 are already married couples. They’re the ones who didn’t wait quite as long as some of their friends did to get married and start a family. 

Figure 11 | Source: National Association of Realtors

Power of the Consumer - NAR First Time Home Buyer Age Group

Figure 12 | Source: National Association of Realtors

Home Sales Consistently Rising Since 2010

Below is a look at existing home sales since 1999. Notice that they have been steadily increasing since they last bottomed out in late 2010, and, except for the brief drop during the COVID-19 lockdowns, they have continued to grow at a very robust pace. This is due to the movement we’ve been discussing where the Echo Boomers are concerned. It seems that the aftermath of the COVID-19 lockdowns and the violence we’ve seen over the last several months in urban areas has been to accelerate the move away from crowded urban centers. Away from areas where viruses are more easily spread and out to the suburbs where the population density is far lower, and there is some measure of security. 

Advisors Perspectives Existing Home Sales

Figure 13 | Source: Advisor Perspectives

We can see evidence of the same thing happening in the New Home market in the next chart. Note that we’re not at the levels we last peaked at in 2005 in either of these charts, but that we’ve got a large wave of home buyers coming in line that may well push both of these sectors back to those levels again in the not too distant future. 

Advisors Perspectives Housing Units Building Permits

Figure 14 | Source: Advisor Perspectives

What Does it Take to Build a Home?

Now, consider all the things that are directly linked to home sales and home building: 

  • Lumber
  • Windows
  • Doors
  • Roofing materials
  • Electrical equipment
  • Drywall
  • Carpet
  • HVAC equipment
  • Paint
  • Blinds
  • Siding
  • Appliances
  • Plumbing and bath fixtures
  • Landscaping
  • Irrigation equipment
  • Earthmoving equipment
  • Cranes
  • Concrete
  • Metal re-bar
  • Fencing materials
  • The list goes on and on 

All of this stuff has to be manufactured, and manufacturing things takes labor, meaning it employs people, lots of people. Those jobs tend to pay pretty well too. 

Household Earnings are on the Rise

Take a look at the Median Real Household Incomes by Age Bracket in the chart below. Every age group is seeing greatly increased earnings. This is what we call a positive feedback loop, where economic growth that increases demand feeds upon itself by creating more demand from the additional labor capital needed to meet the ever-growing demand. It’s how we get sustained growth, and it’s caused, or slowed, by the force of the demographic wave acting on the economy at any given point in time. 

If the wave is a growing one, the part of the economy it’s acting on, and generally, the economy as a whole will expand. If the wave has already crested and getting smaller, the part of the economy it was acting on, and generally, the economy as a whole will begin to slow. Today the wave is a growing one, causing the economy to expand. 

Advisors Perspectives Media Household Income Age Bracket

Figure 15 | Source: Advisor Perspectives

Manufacturing Index Hit a Two-Year High

All of this demand is showing up in the Manufacturing sector, as indicated in the chart below. The ISM Manufacturing Index jumped to a two-year high in October and shows strong growth that’s increasing at a fast pace. This is all good news and demonstrates the power of the consumer doing what they do every day to move the economy forward, especially when their wages are increasing. Remember what we talked about earlier; “It stands to reason then that the more money people have at their disposal, and the more likely they are to spend those resources, the more robust our economy becomes.”

ISM Manufacturing at a Glance

Figure 16 | Source: Advisor Perspectives

Automotive Industry and The Power of the New Family Consumer

But housing isn’t the only thing the Echo Boomers are affecting as they barrel headlong into their family formation and child-raising years. Not in the least. Think about the automotive industry for a moment. It’s been speculated that the luxury car market may have peaked for several years as the oldest of the Baby Boomers is now in their mid-’70s and likely will not be buying too many more vehicles. The youngest of the Baby Boomers is now (or will be soon) 56 years old, and the peak buying age for luxury cars in the mid-to-late-’50s. 

However, think about the Echo Boomers. They’ve got kids to shuffle around now. They can’t use Uber or Lyft all the time, now that they have living luggage, so it’s much more likely that you’ll see them in a minivan with a bumper sticker that says “I used to be cool,” or an SUV of some kind, for the next several years. All those vehicles have to be manufactured too. Whether they planned on it or not, they’re going to buy vehicles that they once laughed at because they’re practical for a family. 

The point is anything that you know people with young families have to buy to get by daily will be in demand. With young families come the daily trips to Wal-Mart, Rite-Aid, Costco, Walgreens, Price Chopper, Home Depot, and Lowes, not to mention Quick Trip, McDonald’s, Culvers, Freddy’s, and the like. 

Baby Boomers Consumer Power in Vacation Homes

Let’s turn our attention back to the Baby Boomers as we close out this article because they are still a group of consumers that are a force to be reckoned with. They are throwing the weight of their demographic wave around in the real estate market once again. The last time they had a massive impact on the real-estate market was the bubble that peaked in 2005, with the building industry overbuilding what we laughingly referred to as McMansions. They forgot there was an end to the wave of demand for those kinds of houses, even if only for a decade or so. And many paid a steep price for failing to see that the demand was finite. 

Today, Baby Boomers are driving another boom in real estate, vacation homes. 

NAR Vacation Home Sales

Figure 17 | Source: National Association of Realtors

I believe the fallout from COVID-19 lockdowns and ongoing violence in too many of our cities is accelerating this trend as well, as the Boomers seek something that feels like normalcy. They can’t find it in suburbia any longer. 

This real estate trend is just as powerful from a manufacturing need as the Echo Boomers’ real estate trend. Unless you buy a fully furnished lake house with all new appliances and flooring, which is hard to find, you’re going to be replacing a lot of what was in the vacation home when you bought it. Again, all this stuff has to be manufactured, and it’s all in short supply right now as manufacturers struggle to keep up with the overwhelming demand. 

Vacation Home Sales

The flight to vacation homes is also having a significant effect on the value of real estate in places where people tend to buy vacation homes, and it’s dramatically reducing the amount of time that vacation homes tend to be on the market. 68% of vacation homes sell in less than a month, which is unheard of. Notice in the charts below from the NAR that Lake of the Ozarks (Camden, MO) and Table Rock Lake (Stone, MO) had large sales increases from June – September and large price gains. 

Figure 18, 19, 20 | Source: National Association of Realtors

This is a trend that is also going to continue. Going back to the spending wave, the average age of those buying a vacation or second home is 65. Millions of boomers under 65 will be deciding to jump on that bandwagon over the next ten years. That will help continue to grow the U.S. economy and the local economies where they eventually buy that vacation or second home. 

You, the Consumer, Have the Power

I realize this has been a long article, and I hope all this not only has begun to make sense but that it has shown you how much power there is in the American consumer. Especially when acting en masse as a generational block, it’s incredibly powerful and incredibly predictable. 

At some point, I intend to explore this topic further and in more detail. I realize this is way more than enough to try and digest. So, I’m going to stop here. Having said that, if you would like me to spend more time on any of the points we’ve covered today, or there are other demographic/consumer-related topics you’d like to see covered in a future article, please let me know. I’ll be happy to oblige when/if possible. 

We take all of this information into account as we look at the economy and the markets to help our clients navigate the inevitable waves safely and successfully. 

Have a great day!

Shane Barber

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The views expressed represent the opinion of Barber Financial Group an SEC Registered Investment Advisor. Information provided is for illustrative purposes only and does not constitute investment, tax, or legal advice. Barber Financial Group does not accept any liability for the use of the information discussed. Consult with a qualified financial, legal, or tax professional prior to taking any action.