In prior postings, I’ve illustrated that a by-product of the financial mayhem in recent years has been shrinking employment in the financial services sector.  It got me thinking – perhaps there’s more to it than just the single volcanic-like eruption ignited by the U.S. housing and mortgage fiasco.  Is there a trend in the making?

My curiosity is also fueled by this question from a smart (not just because he reads my stuff) financial advisor:

Hi Mal,

Just a quick word to mention how much I enjoy reading your comments – here`s something that I`ve noticed over the last few years, was wondering if this trend is all over or more of a local thing: I`ve noticed that in the last 4 years, nobody under 50 contributes, or even opens RRSP accounts, too busy are they building these 30,000$ bathrooms for their homes…. what would that tell you??”

As the make-up of the population continues to change, government policy desperately tries to make sense of these changes and adjust, but the hardest hit by evolving demographics is usually the unprepared financial sector.  I borrowed this quote from a study published in the Journal of Shopping Center Research (2007, by Richard K. Green and Patric H. Hendershott): 

In 1989, Mankiw and Weil (1989) published their infamous forecast that real house prices would decline by 47 percent by 2007 in response to the aging of the Baby Boomers (right number, wrong sign!). They used data from one year—1980—to relate housing demand to age. They found that the demand for housing rose until around age 50 and declined sharply thereafter. Largely for this reason, they forecast that housing demand would decline as the Baby Boomers aged and thus that real house prices would fall precipitously.

I agree that reading this in 2007 was hilarious!  But skip to now, and isn’t the precipitous decline in the prices of housing in the U.S. just what the authors of the study foretold?  It was pretty silly for them to pick a number (like -47% in ‘real’ prices) since predicting important metrics such as future inflation (or the taming of it) and interest rates (falling to zero) back in 1980’s would have been grasping at straws to say the least. 

The following chart illustrates the changing age distribution in the United States since the 1960’s.  I’m too long out-of-school to mess with statistics, but even I can figure out that if you were between 18 – 44 years old in 1990 (which includes me) then your age is somewhere between 40 – 66 in 2012.  The question is what are those youngsters behind us going to do with their money?

The objective and conclusion of the Green & Hendershott study (where I got the quote above) was to determine any link between age and spending.  The best they could come up with was this:

“For those under age 40, retail spending is significantly lower than for those over age 40. The young tend to spend relatively more heavily on housing and education (including paying off loans).”  

However, the more interesting part of the study was acknowledging that spending patterns are signficantly impacted (biased) by when one was born.  There’s reason to expect that in the future, it might be young people who do the retail spending, and us older folks having to spend whatever we’ve got left on housing. 

Depression era folk were understandably thrifty and careful, but Baby Boomers were better educated, working at good paying jobs and could afford to spend and save and borrow which they did.  But looking ahead, when it comes to trying to statistically determine what saving and spending patterns are “going” to be in the future, the best we can do it seems is conjecture.

Elderly folks are supposed to spend less on housing and more on retail goods.  Based on the latest U.S. GDP data, government spending is being slashed across federal, state and local levels.  I think it’s safe to assume that there’s going to be far less ‘retail’ spending by us aging folks in the future.  According to the U.S. Bureau of Labour the industry sector with the highest employment is “health care & social assistance.” You read the news; do I have to paint a picture of who will suffer most by government ‘austerity’ measures?  The older we get, the more we will have to tap into whatever savings we have in order to simply have a place to live and something to eat.

The population ‘below 50’ is mostly comprised of Generation Xers – 36 to 46 years old – highly educated (about 30% university grads) and more than ever come from broken homes.  These folks have been borrowing heavily to buy homes and raise their own families.  Marketing gurus suggest this group is pretty conservative and fiscally cautious – and has undoubtedly contributed to the rapid growth in financial services (insurance, banking) over the previous decades.  But what has saving done for them lately?  Is it any wonder that a $30,000 renovation for the kitchen (maybe cashing in retirement savings) is more attractive than watching one’s retirement savings devastated by volatile markets? 

The real wild card are those below 30, or often referred to as the Generation Y kids (or mY kids).  They are tech-savvy and sophisiticated but most important, this group is oblivious to the values cherished by the parents of their parents.  When I read the latest Advance Monthly Sales for Retail and Food Services (December 2011) report I was not surprised, based on what my kids do – that nonstore retailing has grown yet again, +12.5% since last year (the next generation is Internet shopping friendly), and that food services and drinking places enjoyed a 6.1% lift, and clothing and clothing accessories spending grew 5.9%.  More like Europeans, the young are more active socially and for longer.  This may seem a bit tongue-in-cheek, but what if a philosophy of spend-all-you-earn is deeply ingrained in younger people?  And why not?  This next generation is keenly aware of tribulations suffered by those who’ve gone before them.  Take income levels as a for instance:

Over the past ten years, they’ve watched average income levels stagnate. And even if they can save, why bother?  The S&P 500 Index returned a measly 2.92% over the past 10 years, and less than nothing over the past five.  The banks won’t pay them anything at all on their savings deposits.

 And what about the job situation?  According to the U.S. Department of Labour:

As the baby boomers continue to age, the 55 and older age group is projected to increase by 29.7 percent, more than any other age group. Meanwhile, the 45 to 54 age group is expected to decrease by 4.4 percent, reflecting the slower birth rate following the baby-boom generation. The 35 to 44 age group is anticipated to experience little change, with a growth rate of 0.2 percent, while the population aged 16 to 24 will grow 3.4 percent over the projection period. Minorities and immigrants are expected to constitute a larger share of the U.S. population in 2018. The numbers of Asians and people of Hispanic origin are projected to continue to grow much faster than other racial and ethnic groups.

Add it all up and what do you get?  Hardly very scientific but here’s my guess:

• Plenty of low paying service jobs for the next twenty years – younger people providing services for the remaining well-heeled older people.  If you don’t like the job, find another one.  Education and training available ‘on-the-job’ or via the Internet.
• A growing population of middle-aged people less interested in owning a home (or owing a mortgage), and an increasing proportion of single-person households.  Current lifestyle is far more important to them than accumulating assets or saving in a corporate world riddled by fraud and broken promises.

It will be harder to convince the youngest generation that a higher education will lead to higher paying careers, as it did for the Baby Boomers.  In all likelihood they’ll continue working in the same industries doing the same jobs in high demand they have now.  It will be increasingly difficult to inspire them to sacrifice lifestyle and save for a future that is so uncertain.  They are much too aware that their investment dollars and savings will only be used to fund the excesses of previous generations.

It will be a colossal challenge for the financial services industry (and many other industries to be sure) and governments to find ways to inspire young workers to invest and save, because if they fail the debt crisis can only get far worse than it is already – without savings and investment there’s little prospect of funding never mind reducing the massive deficits already in place.  We’re already trying to coerce (easier mortgages, low interest rates) them into buying homes with very little success – if the financial burden imposes upon their lifestyle they just walk away.  Providing portable pension and retirement savings plans is a baby step in the right direction.  Since they won’t be loyal to their mediocre jobs, providing flexibility and convenience or e-EVERYTHING) is crucial to retaining them as financial services customers.  Some may spend their lives never even visiting a ‘branch.’  Most difficult of all will be discovering what makes them tick?  Fearless, this group won’t be frightened into buying insurance, saving for retirement or keeping a piece of land.