Baby-Boomers cut spending, start saving

US savings Aug10.pngConsumer spending is 70% of US GDP. And because US GDP is so large, this means the US consumer is 17% of global GDP. This is the same as the combined GDP of China and Japan, who rank 2 and 3 after the USA.
So a change in US consumer spending matters. And it particularly matters to the chemical industry, as our products are focused on consumer needs. Thus the blog is taking very seriously indeed comments from major US consumer companies, who suggest we can no longer rely on the “shop-till-you-drop American consumer” to support global demand. For example:
Wal-Mart, the world’s leading retailer, has seen its US same store sales drop for the last 5 quarters. This has not happened before. Wal-Mart also warned they expect consumers to “remain cautious about spending“.
Target, the leading discount store, confirmed the blog’s view that March was the peak of the cycle, with CEO Gregg Steinhafel saying “its clear Q2 marked a change in trend. GDP growth softened considerably, and our sales trends levelled off as well“.
Procter & Gamble, the world’s largest consumer products company, gave the same message. “Consumers day-to-day spending reflects an entrenched frugality that often means leaving P&G’s relatively inexpensive products on the shelf.”
This is serious stuff. And it links with major demographic changes taking place in the USA. The boom in chemical demand over the past 40 years is closely tied to demand from the ‘baby boomer” generation (born between 1946 – 1964). They now own 80% of all US personal financial assets and are responsible for over 50% of discretionary spending power.
But they are getting closer to retirement, with a median age of 54 years. And so their need for ‘new things’ is reducing, as is their ability to afford them. Equally, as the above chart from shows, their savings rate is starting to shoot up. They were let down by the stock market after the dot-com boom; then the housing market disappointed.
So now we seem to be seeing the start of a generational switch from spending to saving in the world’s most important market. From close to zero, the savings rate has already jumped to 6%, as baby-boomers worry about how to afford their retirement, especially as they can expect to live longer than any generation in history.
Of course, if stock market and housing prices began to recover, then this trend might reverse again. But there is clearly a danger of a vicious circle developing, where fear replaces greed as the prime driver in financial markets, and drives a growing demand for yield.
The back-to-school season, now underway in the USA, is the second most important shopping period of the year. It will therefore be even more critical than usual for those wishing to forecast chemical demand.
If Wal-Mart, Target and P&G are right, then the US economy could easily see US GDP growth of below 2% in Q4.
This would not be good news for everyone in the chemical industry, dependent on the US consumer to drive future demand.

3 thoughts on “Baby-Boomers cut spending, start saving”

  1. John Butterfield

    Very interesting Paul…
    Do you know if the switch in sentiment towards saving rather than spending is more or less pronounced across other G10 economies (Japan obviously a given)
    As well do you not think that in line with your earlier piece on increased purchases of junk bonds from the retail sector, this trend will be quickly reversed as soon as confidence returns? Panic-buying from the baby-boomers who lost a lot during the recession perhaps?
    Best rgds, John

  2. John thanks for the comment. Yes, one can see long-dated government bond yields in all the major economies are at very low levels – for example, the yield on the German 30 year bond just went below 3% for the first time on record.
    Of course, this is leading to a lot of comment about a ‘bond bubble’. And you are absolutely right that if this is simply due to a lack of confidence, then eventually braver souls will profit from their fears. But I don’t see this as a confidence issue, just as I disagree with those central bankers who see the financial crisis as just a liquidity issue – I think its a solvency issue.
    Thus I do see a well-developed bond bubble in one area of the market, where investors are searching desperately for yield, and are buying high yield corporate bonds indiscriminately to try and boost their income. This may well end in tears, if the economy heads into the fundamental downtrend that I foresee.
    But if we are moving into this downtrend, then I think we will continue to see a secular shift back into government bonds as the bedrock for personal savings. The reason is that it is only the ‘babyboom generation’ who have ever seen equities as a suitable basis for pension and other long-term savings.
    This ‘cult of the equity’ has only ever existed in our lifetimes – before this, investors always assumed that equities were inherently risky and needed to pay higher dividends than government bonds in order to be attractive. And those same investors were prepared to do proper analysis to determine if that yield was sustainable, or if the company was likely to go bust.
    I think the babyboom generation is starting to rediscover previous verities as they age, and require guaranteed income during their retirement.

  3. Paul, it doesn’t matter how big or small an economy is – surely people must realize that we also need to produce goods on the one hand before the hordes consume. And doesn’t that apply equally as well to a local V global economy?
    I know the demand is there but some of the manufacturing base needs to be in the west ie country/ area where all this consumption is taking place. Just my 2c worth..
    Harry Dent argues that the economic cycle is more dependent on the generation spending wave. And that indicates that things are not going to improve for quite a while yet. I hope he’s wrong, but in the mean time I am one of those boomers who is cutting spending and trying to save more!.

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