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Demographic blues

February 11, 2014

I read a fascinating new book recently by an author and economic forecaster named Harry Dent, Jr. The book, The Demographic Cliff: How to Survive and Prosper During the Great Deflation of 2014-2019, has some interesting (and worrying) insights into what might be in store for the U.S. economy over the next few years. What Mr. Dent focuses on in the book is when we spend our money, and what those spending patterns might mean in the context of a nation whose biggest and most influential generation is making the transition to retirement age. As the book points out, we do most of our spending when we are middle aged, somewhere in the neighborhood of 45 to 46 years old on average.

 

The whole age vs. spending breakdown is pretty interesting: the average age of our first home purchase is 31; largest home purchase between 37 and 41, then our spending peak in the mid 40s, college tuition spending hits around 51, and our last major durable goods spending item to peak is automobiles at age 53. While we reach our peak net worth at 64, that’s almost two decades after our spending peak. The reason that’s important (and ominous) is that with the Baby Boomers well past their spending peak, the economy is unlikely to recover in a substantive way anytime soon.

 

Remember, the U.S. economy is primarily driven by consumer spending: 70% of GDP is derives from spending. Essentially, demographics are tanking the economy. This also means that we’re not likely to start the next boom until around 2023. What does that mean for investors? If the country is not spending, you really need to watch out for stocks—the market is based on future expectations of growth, and when those expectations do not come to fruition, the market can experience a serious correction.

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This material has been prepared for informational and educational purposes only. It is not intended to provide, and should not be relied upon for, accounting, legal, tax or investment advice. Please consult with a professional specializing in these areas regarding the applicability of this information to your situation.

Andrew Wood, Dan Simon and Alison Slezak are Investment Advisor Representatives. Advisory services are offered through CoreCap Advisors, LLC., a Registered Investment Advisor. CoreCap Advisors, LLC and Daniel A. White & Associates, LLC are separate & unaffiliated entities. 

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