One of the most powerful engines of the economy may be at risk.
That’s because baby boomers, America’s second largest and wealthiest generation, can suddenly reverse their spending at the first sign of economic or market turmoil, according to Brij Khurana , a fixed income portfolio manager at Wellington Management.
Khurana thinks that what made the boomers the wealthiest generation – stocks and houses – also puts them at risk of economic stability.
Even a simple correction in asset prices could hurt Americans who are old enough to control their spending and kick important support out from under the economy, he told Business Insider.
Such a situation is a “very underappreciated risk,” he said, given how the boomers’ high spending habits have fueled economic growth in recent years.
This generation is already showing the first signs that their spending power is beginning to wane. Despite the boom in travel in recent years, only 19% of baby boomers said they plan to travel by 2024, according to a McKinsey & Company survey, lower than the 38% reported average. throughout the generations.
Boomers are also showing that they are starting to move out of stocks and into long-term fixed income, Khurana says, pointing to the rally in old US treasuries. The iShares 7-10 year Treasury bond ETF is up 6% in the past year.
“I think that’s partly because of the changes that are happening in the distribution of goods,” Khurana said.
The shift from bonds to stocks is common as people age and move to protect their wealth after years of accumulation. However, some commentators have noted that as boomers position themselves in large numbers, they risk panicking the market and creating uncertainty as they sell their holdings.
Also, because they don’t have the same long horizons as younger investors, boomers may be afraid to sell in a downturn, exacerbating market losses as they seek to reduce their short positions.
Khurana says that he confirms the chances of economic recession in the next two to three years to be more than 50%. That’s in line with a view from economists at the New York Fed, who have priced central banks at a 61% chance of a recession in the next 12 months, according to their latest estimate. -rao.
“If the prices of goods, even if they come down from very high levels – even if they fall, they cost it 10% – then I think it’s an important psychological issue,” he said. “And you can see them reducing their spending and [if] the savings rate rises, which would cause the economy to collapse in that world.”
Those who spend a lot of money
Bad news for boomers is bad news for the economy, given how much economic growth has depended on spending their money down their nest egg in recent years.
The demographic spends about $548 billion a year, more than any other generation, according to a report from marketing research firm Epsilon. Meanwhile, they saved less than any other generation last year, and the average boomer put away just $4,059 in 2023, according to a report from insurance firm New York Life.
Their spending power is fueled by the wealth that the generation is developing into, Khurana says. Boomers were sitting on $78.5 trillion in the first quarter of this year, or the equivalent of 52% of total US wealth, according to Federal Reserve data.
Baby boomers held the majority of all US wealth last quarter. Federal Reserve Board of Governors
This generation is very rich because they hold the largest share of real estate and property in the country, which has seen its value in the last five years.
Because of the destruction of assets and stocks of each generation, boomers are responsible for 42% of all real estate and 54% of the equity of businesses and mutual funds.
Boomers had about $19 trillion in real estate in the first quarter. Federal Reserve Board of Governors
Boomers also own the largest share of business stocks and mutual funds, about $23 trillion in the first quarter. Federal Reserve Board of Governors
“What I think is happening is, because asset prices have gone up, they feel very comfortable spending aggressively,” Khurana said. “There’s no doubt that I think they’ve definitely progressed better in this environment than other generations.”
However, the gains they have made in the stock and housing markets have also put the champions in a precarious position, with the club at risk of financial ruin if home or property prices fall. .
Home prices and equity have hit record highs in the years since the pandemic, but analysts, including Khurana, think a recovery in both markets could be imminent.
John Hussman, one of the best forecasters in the market, estimated that stocks could have a low of 70%. According to another indicator tracked by his firm, the market looks the most important since 1929, he said in a recent report.
Home prices, meanwhile, are already starting to fall in key metros that boomed during the pandemic, such as cities in Florida and Texas. Home price declines rose to their highest level in 5 years in August, according to a Realtor.com report.
That doesn’t mean boomers will cause the next recession, but the risk during a recession is presented under the current paradigm, Khurana said.
“I think that the increase in the savings rate caused by the fall in the price of goods is a risk that is not on people’s radar and it is definitely something that can cause a recession. And I think that the possibility of that really higher than most people think. In the next five years, or two to three years, to be honest.”