A Look at the Likely State of the Economy Over the Next Several Years (Part 2)

Why the aging of society has helped bring on the Great Real Estate Recession

I have been astonished by how much economists and marketers ignore the influences of demographic changes on the economy at-large and the marketplace in particular. Few seem aware that theU.S.’s aging population has dramatically changed the calculus of supply and demand.

Ignorance of that has brought us perilously close to the state that Japan found itself in when early in the 1990s it plunged it into its own Great Real Estate Recession that began unraveling what had been called "the Japanese Miracle." This happened despite predictions made as recently as in the late 1980s that Japan’s economy would strip past the U.S. to become the world’s largest economy by 2000.

Of course that never happened. Like the state of affairs in the U.S. in recent times, the Japanese real estate market was outrageously inflated. And also as in the U.S., intemperate lending practices underwrote a faux real estate boom that ultimately weakened the entire Japanese economy. Finally, consumer spending in Japan began declining because older people who buy less came to outnumber younger people who buy more.

Japan has now suffered more than a dozen years of deflation and recession, punctuated by short bursts of anemic economic growth. Could we be facing a similar economic malaise here in the U.S. over the next decade?

That such could be the case is not far-fetched. While interest in marketing to adults over 50 is heating up, this age group spends considerably less per capita than younger adults. In the past, this was no problem because the young adult population kept expanding from one year to the next. That is no longer the case. The U.S. census estimates that even with immigration taken into account there will be virtually no growth in the under-50 adult population through to 2050.

Per capita household spending peaks around the age of 48. Thereafter, until around 60, spending in most categories begins declining. The pace of decline begins accelerating around the age generally said to be the average age at time of retirement in the U.S.– 62.

The correlation of age and spending is so strong it is astonishing that few economists, business analysts and marketers pay it much attention. Take housing, for example: 35-44-year-olds spend more on housing than any other 10-year age cohort. Because this cohort is now shrinking, housing demand has fallen off precipitously.

When I first predicted the coming of the Great Real Estate Recession nearly 20 years ago, some people argued, shrinkage in housing demand among younger adults will be made up for by the ‘age wave’ driven by aging boomers.

However, a boomer couple who moves to Sun City has not added to housing demand. The couple has just replaced one home with another. For most people, someone has to buy their traditional home before they can close on their retirement home. This has become more difficult to accomplish with population shrinkage in the key home-buying cohort – 35-44-year-olds.

The “birth dearth” that followed the “baby boom” began in 1965. That was about four years after the pill became widely available. The fertility rate dropped an astonishing 135 basis from the previous year, 1964. That is the year generally held to be the last year of the baby boom.

We have become so accustomed to continuous economic growth that we find it difficult to accept the idea that we could be entering a sustained period of economic stagnation and possibly worse. Various commentators in the media claim that we’re just in the bust phase of another boom and bust cycle.

However, we’re not in just another boom and bust cycle. The birth dearth makes this bust a very different kind of bust. Ever since the birth of the consumer economy in the late 1800s, perennial population growth has been the main driver of economic growth. The cessation of population growth in the high-spending under-50 population is seriously undermining economic growth in nearly every developed nation.

Denial is a common reaction when people are confronted with challenges that seem beyond their coping abilities. Companies are prone to similar responses. But, despite the gloomy picture I have been presenting, life will go on. There will be winners and losers. Those who win will have adapted to the new economic and marketplace realities of an aging society. The losers will be those who fail to adapt but instead stand by waiting for things to return to “normal.”

NEXT: A few thoughts on coping with slow economic growth over the next 10 years

Comments

[Shama Hyder]

Fascinating David! I had not thought of this either. I look forward to the next post in this series.

[Laura]

Very interesting perspective. As a Gen X'er I forget just how large the Boomer generation is and what an impact they have on society. I can't wait to hear your suggestions on dealing with this mess.

[C.B. Whittemore]

David, thank you for injecting reason into the irrationality around us!