Boomers to the rescue, again
By Joe Higgins, Quest 4 Quality
Some sectors of our economy are rising and others are falling. Consumer spending has cooled, unemployment is rising and consumer confidence has declined for three months.
On the other hand, GDP has been solid, infrastructure spending is at an all-time high and overall retail sales are up. What does this all mean for the immediate future? Let’s explore what will hurt consumers, and the parachute that will change the future of the home goods business and remake housing.
Let’s begin with four red flags we need to watch:
Savings and Consumer Spending: Consumer spending has cooled and the personal saving rate in the U.S. fell to 3.5%, the lowest since October 2022. At one point in mid-2020 the savings rate topped out at 35%, but has fallen every month since. At one time consumers’ total savings hit $2.2 trillion but that too has fallen, to below $200 billion as of this writing. Consumer spending, which is 71% of GDP, will contract this year as savings are depleted and interest stay at current rates. Expect a downturn later this year as spending declines in Q4 and into 2024.
Oil and Gasoline: Across every major intersection in this country you will find the current price of gasoline on illuminated signs. It is obvious that everyone knows the price of a gallon of gas.
I recently spent some time in California, where gas sold for $5.70 a gallon. High oil prices have a history of being the catalysts for recessions and today gasoline prices are near their all-time high.
In fact, oil prices accounted for 50% of the rise in September’s Consumer Price Index. So, before you go out and buy a gas guzzler, consider that the global price for oil and gas will probably remain elevated for years to come as the lack of investment in new oil production has created a classic supply-and-demand equilibrium problem that is not going away. This will slow spending and could lead to a mild recession in 2024.
Mortgage Rates and Housing: Mortgage rates, now about 7% and possibly headed for 8%, have turned the housing market upside down. Builder confidence reached a new low in September as homebuilders scrambled to maintain sales volumes. Existing home sales, at just over 4 million in August, are down 15.3%, with inventory at a meager 3.3%. Shares of top homebuilders like D.R. Horton, Pulte and Toll Brothers are at their lowest since June.
Single-family housing starts were up 2.4% in August, but multi-family starts were down a whopping 41%. The average monthly mortgage payment across the U.S. is approaching $2,400, up more than 58% from 2021. Everything related to owning a home is more expensive, with insurance, repairs, maintenance and materials at all-time highs. This is one of the most important sectors for our home goods business.
Unemployment: The bright spot in the economy for the past three years has been low unemployment numbers. They have averaged 3.5% for most of this year and are now at 3.8%. I believe the COVID-driven hiring frenzy is finally over, and after 18 months of interest rate hikes the economy is starting to slow and the unemployment rate will rise to 4.3% by next year. While this will reduce inflation, it could also put us into recession.
The Bottom Line: There are other issues to worry about: The government debt crisis, though settled, will return in 45 days, student loan payments resumed this month and the UAW strike will cost the economy millions and raise automobile prices. The Federal Reserve has temporarily paused interest rate hikes, but inflation is still above their mandate of 2%, meaning more rate hikes are a possibility.
So, you may ask, with all this unwelcome news, where is the possible golden parachute of the headline? Well, do you plan to be in business for the next 15 years? Consider this: baby boomers (those born between 1946 and 1964) are the wealthiest population segment in the world. They were raised during the boom period following World War II and accumulated more wealth than any demographic that followed them.
According to estimates by Bloomberg and J.P. Morgan, boomers will pass on somewhere between $42 trillion and $68 trillion to their heirs. This transfer of wealth is already happening and will escalate over the next 15 years, peaking in 2038.
Why are boomers so affluent? A 1,500-square-foot home in California sold for $28,000 when I graduated college. Today, that house is worth more than $1.3 million. The stock market alone has delivered trillions of dollars to boomers over the past 50 years, and much of that cash now sits in brokerage accounts.
The generation that will benefit the most from the wealth transfer will be their millennial children. They will buy homes and automobiles, pay down debt and invest in equities.
So stay the course; driven by the 25- to 40-year-olds, it will be a period of wealth and prosperity.
Joe Higgins is a 46-year veteran of GE and Whirlpool Corp. who brings his executive experience to bear as a business consultant, AVB keynoter and YSN contributor. Visit his website, Quest 4 Quality with Joe, at www.q4qwithjoe.com.
