Both generations grew up amid a major financial crisis, making them less willing to spend and more likely to save. What sets them a part, though, is the burden of student loans.
Millennials have a bad rap. We imagine them spending their days updating social media accounts with headsets covering their ears and their parents’ credit card numbers pre-logged into Amazon Prime accounts.
A nice life if you can get it, but the reality is far different, according to research by Standard & Poor’s. Millennials — those born between the early 1980s through the early 2000s and also known as Generation Y— are shaping up to be a frugal and career-focused generation with the potential to lead a robust and sustainable U.S. economy. We I say potential because they’re not yet the potent economic force that they could be; they are thus far a quiet group, economically conservative and waiting for better conditions to roar to life.
The success or failure of this generation will have widespread economic consequences. Already, millennials spend about $600 billion annually and are on track to spend $1.4 trillion a year by 2020.
According to our research, continued low wages for millennials could reduce U.S. GDP by as much as $244 billion through 2019, or $49 billion a year, relative to our baseline scenario. This suggests that policies around housing, wages, and the new threat caused by high student debt may have the greatest potential to help or harm millennials — things policymakers should heed as this generation grows as a political force.
We come to this conclusion in part by looking to the past. If you compare millennials to other generations you’ll find, somewhat surprisingly, that they share the most similarities with the so-called Silent Generation. These were Americans born in the mid-1920s through the early 1940s and who grew up during the Great Depression, but eventually drove a booming economy.
Just as their grandparents (and great-grandparents) before them, millennials experienced a major financial crisis during their formative years that has infused in them financial conservatism and a propensity to save. They are more likely to keep a larger amount of cash on hand, holding more than half their assets in cash, less than a third in equities, and 15% in fixed-income assets.
So why aren’t millennials guaranteed a strong economy in their middle years? The differences with the Silent Generation come in two areas, in particular: a slow-growth economy with lower wages combined with crushing loads of student debt. The Silent Generation entered adulthood during a robust growth cycle in part due to programs, such as the New Deal and Works Progress Administration. Millennials, instead, have only seen slow to moderate growth in GDP, with near stagnant gain in wages as they enter the workforce.
Adding to this difficulty are massive student loan bills. Millennials are the most educated generation in American history, but it has come at a cost ranging in the hundreds of billions of dollars. Indeed, many of millennials’ spending and saving habits can be attributed to this debt – a major determinant of current and future spending ability, given the length of loan maturities and weak post-recession wage growth to date.
To see the weight student-load debt is having on millennials, consider this: for the first time in at least 10 years, 30-year-olds with no history of student loans are more likely to purchase their homes than those with a history of student debt, according to the New York Federal Reserve Bank. The effects of student-loan debt could be mitigated if the economic recovery continues. A growing economy means the launch of the millennials into the U.S. economy will have been delayed, but not grounded.
Over the next five years, I expect the labor market will keep improving and wages will start increasing. Student loans that once looked very difficult to repay will become manageable, and delays to home-buying—albeit more skewed toward urban areas than in the past—will pick up.
My downside scenario, however, paints a grimmer picture. What if wages continue to stagnate through the next decade due to fundamental shifts in the U.S. economy? How would this anemic (or absent) growth impact a generation, which already must wait an added four years to reach middle-income status?
First, graduates with modest income opportunities would likely continue to use government options in order to delay student-loan payments – an option that may prevent default, but also means balances would climb. More borrowers would be caught in the web of higher balances, where they can only barely cover minimum payments, which in turn would continue to weigh on their credit scores.
The potential impact of this outcome on the economy could be significant. Millennials would likely be forced to continue their current pattern of economic behavior, avoiding big-ticket purchases like cars or homes and continuing to delay starting families. Options to take on more debt to start a business would be curtailed, with business creation holding near current 20-year low levels.
Further, housing starts would climb only slowly, with most activity in rental units, rather than single-family homes. Indeed, if millennials were to buy homes at the same sluggish rate as in the current recovery, housing starts wouldn’t reach 1.5 million units until almost two years later than in our baseline projection.
This is why it’s crucial for economists, policymakers, and the business community to consider this downside scenario when thinking of the future of the U.S. economy, and to have options ready to combat a difficult adulthood for this otherwise promising generation.
If, as we hope, millennials inherit a more robust economy and with higher wages and growth potential, we will more likely see the launch they appear very capable of orchestrating.
Beth Ann Bovino is the U.S. chief economist at Standard & Poor’s.
As appeared in Fortune Magazine.
U.S. Economic Forecast: The Terrible Twos
Recent data suggest the U.S. economy has rebounded fairly well from its contraction in the first quarter of the year, giving financial-market participants, as well as American businesses and consumers, reason to be somewhat optimistic. Job gains accelerated after a lull in March, and housing activity strengthened after a deep winter chill. Also, at long last, households are spending some of their now-rising wages and the money they’ve saved at the gas pumps.
In this light, we have raised our forecast for second-quarter U.S. GDP growth to 2.8%, from 2.1% in May. The Bloomberg June survey of consensus forecasts had second-quarter growth at 2.5%.
But while markets may have breathed a sigh of relief, there’s a lingering feeling that the first quarter’s contraction represents more than a mere blip. In fact, a number of indicators suggest U.S. growth will toddle along at best. In this light, we now expect full-year U.S. GDP growth of 2.3%, down from 2.4% in our May forecast and below last year’s economic expansion of 2.4%. Worse yet, we don’t expect the world’s biggest economy to outgrow these “terrible twos” any time soon.
To be sure, much of the economy has warmed up, concurrent with the weather. And it’s not just jobs data that suggest the ongoing recovery remains on track. Consumers have hit the malls and bought big-ticket items such as cars, and even the housing market has shown signs of renewed strength. Additionally, businesses seem more optimistic about economic conditions, with most manufacturing sentiment readings climbing further into positive territory.
However, although the domestic side of the economic equation seems to be rumbling along–with temporary factors such as the weather, West Coast port disruptions, and the so-called residual seasonality dissipating–the drag from still-low oil prices and the strong dollar, which has weighed on capital spending and production, may still do some damage. And, of course, businesses will need to unwind their inventory accumulation in the first quarter, which will damp spending.
Even with a second-half rebound, 2015 won’t likely be the year the U.S. economy enjoys the level of expansion that typically follows recessions. Although we expect some pickup in 2016, we see GDP growth remaining below 3% through the end of the decade. Our reasons for holding this view are similar to concerns that the International Monetary Fund and the Congressional Budget Office raised last year–to wit, the effects of an aging population on the economy and the prospect of only modest productivity growth.
Whether the U.S. enters into what former Secretary of the Treasury Lawrence Summers has called “secular stagnation”–a period of slow growth, marked by only marginal increases in the size of the workforce and small gains in productivity–remains to be seen. And while specific causes of secular stagnation are difficult to determine, a slower-growing and aging population, greater globalization, and increasingly unequal distribution of income and wealth are generally recognized as contributing factors.
Either way, we’ve yet to even approach the level of post-recession economic expansion that we’ve historically seen. When you consider that the 2.2% average annual growth (2010-2014) we’ve had since the recovery started is only about half the 4.6% five-year average following U.S. recessions (going back 50 years), the recent underperformance is especially notable.
Nonetheless, we think the Federal Reserve will soon raise benchmark interest rates–for the first time in almost a decade. The apprehension that Federal Open Market Committee (FOMC) members showed at their April meeting has eased, and we expect policymakers to lift the federal funds rate twice this year, starting in September–with the target rate rising to 0.5%-0.75% by year-end. However, the central bank is certainly well aware that, while the economy continues to strengthen, there are reasons to take baby steps in normalizing monetary policy. We now expect the fed funds rate to be 1.5%-1.75% by the end of 2016.
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