THE SPENDING WAVE AND WHERE IT LEADS

Another insightful view of our economy from Randy Johnson of Dent Research.

“Typically when we talk about demographics we’re referring to individuals as spenders.  The Spending Wave tracks the number of people in the population at their peak spending age.

“Starting at age 18, we follow people through their lives as consumers, tracking their movements through higher education, first jobs, apartments, early marriage, trade-up homes, empty-nesters spending on travel and cars, and, finally, retirement.

“Aggregate household spending climbs as we earn more money, peaks at age 47 just as our kids are leaving home, and then slopes slightly down.  Knowing this, we can track the number of 47-year-olds in the economy to get a sense of economic growth, which is the Spending Wave.

“It’s easy to see why we spend money in the early years.  We start earning a living so we have a bit more to spend and, once we have kids, living gets a lot more expensive.  But there’s something else to remember.  In our early years we augment our earnings with debt.

“Typically we finance our cars, homes, and even daily living with two auto loans, mortgages, and credit cards.  Debt allows consumers to increase their spending well beyond their paychecks.  When the kids are gone we tend to pare the use of debt, using our empty-nester years to get out of hock and save for retirement.

“We forecast Baby Boomer spending to peak around 2008 just as the highest number of Boomers, born in 1961, reached age 47.  This came after a flurry of home buying, car buying, and credit card use in the early 2000s.

“We all know how that ended.  After the financial crisis, spending dropped, the economy reset, and unemployment shot higher.

“We’ve been recovering for the last decade as we deal with Boomers holding down spending and the Millennials joining the economy, creating something of a consumption tug-o-war.  Boomers still earn the bulk of income, but they’re at the point of saving for the next phase of life.

“Millennials want their share of the economic pie as they join the labor force, but can’t earn enough to buy homes at the same pace as previous generations.  We’re not done with this part of the economic cycle, but it’s getting closer.

“In the worst part of the financial crisis, businesses laid off employees.  As workers found new jobs, they struggled to replace their old income.  Paying workers less allowed companies to be more competitive and eventually ramp up profits, but it came at a cost: unhappy workers.

“The huge generation that joined the labor force in the Disco era is now leaving and there aren’t enough new workers to take their place.  With the economy on stable footing for years and Boomers retiring, unemployment has fallen near record lows.

“Today, the U.S. economy has more job openings than people looking for work.  Companies claim they can’t find enough qualified employees.

“Still, Corporate America has been unwilling to pay higher wages, or has done so only grudgingly.  With unemployment so low, employees are becoming restive, and now workers find themselves in a position of power.

“Companies will have to spend more to attract and retain talent in the months and years ahead.  The problem isn’t about engineers or bankers.  It’s about plumbers, electricians, and forklift drivers.  We’re simply running out of blue-collar, non-college graduate workers, the very people that fuel our national economy.

“The trucking industry exemplifies the issue.

“Truckers are part of the delivery chain for almost everything we purchase.  Whether it is packages left at our doors after we order from Amazon or food at the grocery store, 70% of freight is hauled by truckers.

“Gasoline is delivered to service stations by truckers.  Even our water supply, which is typically pumped from reservoirs, relies on truckers to deliver the chemicals used to make it safe for drinking.

“To call truckers vital to our national economy is an understatement.  And we don’t have enough of them.

“According to the American Trucking Association (ATA), we need another 60,000 truckers right now, and the need is going to grow in the years ahead.

“Part of the problem is economic growth.  As America rebounds, we’re demanding more goods.  We’re also dramatically increasing online shopping, which drives package delivery.

“While the last mile of delivery is not handled by trucking companies, shipping firms move packages among distribution centers via trucks which requires truck drivers.

“Today, 52% of truck drivers are 45 years old or older.  Many will retire in the years ahead.  The ATA estimates that the U.S. economy will be short more than 100,000 truckers by 2026, which is just after the peak number of Baby Boomers retire in 2024.  With so many openings, you might think that trucking companies are ramping up wages to attract more drivers.  They are, but not fast enough to attract the drivers they need.

“And they have a long way to go to catch up to the median pay scale.  Since 2014, truck drivers’ median wage has grown faster than the median wage for all occupations, but truckers still make 13% less than the median annual wage.

“The American Transportation Research Institute estimates that truck driver wages and benefits make up 43% of the cost of shipping via truck.  As those costs go up, so will the cost of delivery, which will drive up the cost of the goods we purchase.  Say hello to inflation.

The Internet Deflator

“Pushing the other way, the internet has served to keep prices low.  The internet is integral to our everyday lives.  We use it to work, study, communicate, research, share, shop, and sometimes, just goof off.

“While we waste a lot of time with cat videos and other questionable pursuits, there’s no doubt that the internet has disrupted many areas of our lives by allowing the almost instantaneous sharing of information.

“Documents travel via email, we buy products from across the country and around the world, we collaborate on work projects and research pieces without needing to travel.  The cost of transmitting is close to zero.

“Just as the Boomers were cutting back their spending, the internet gave us more ways to comparison shop and save money.  It was a match made in economic heaven.  Combined with lower spending by the largest generation, online shopping helped to hold inflation well below the Fed’s target rate, even as the central bank printed trillions of dollars.

“The move to interconnectivity via the web isn’t over, of course.  We are just at the beginning of the internet of things (IoT), where many devices are connected to the internet and can be constantly monitored.  But buying online is now mainstream, with shoppers of all ages checking prices on the internet before they head to the local store, if they get in the car at all.

“Amazon might drive prices a bit lower as it enters new sectors like groceries and healthcare, but competitors in those fields were already fighting a pricing battle against information.

“It’s unlikely that online shopping drives prices lower in the years ahead.  That deflationary ship has sailed.”

The “spending wave” is often now more a ripple then a wave.

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