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Affluent Americans Driving US Economy 04/29 06:20
Older Americans like Harris are fueling a sustained boost to the U.S.
economy.
WASHINGTON (AP) -- Since retiring two years ago, Joan Harris has upped her
travel game.
Once or twice a year, she visits her two adult children in different states.
She's planning multiple other trips, including to a science fiction convention
in Scotland and a Disney cruise soon after that, along with a trip next year to
neolithic sites in Great Britain.
"I really have more money to spend now than when I was working," said
Harris, 64, an engineer who worked 29 years for the federal government and
lives in Albuquerque, New Mexico.
Back then, she and her now-ex-husband were paying for their children's
college educations and piling money into savings accounts. Now, she's splurging
a bit and, for the first time, is willing to pay for first-class plane tickets.
She plans to fly business class to Scotland and has arranged for a higher-level
suite on the cruise.
"I suddenly realized, with my dad getting old and my mom dying, it's like,
'No, you can't take it with you,' " she said. "I could become incapacitated to
the point where I couldn't enjoy something like going to Scotland or going on a
cruise. So I better do it, right?"
Older Americans like Harris are fueling a sustained boost to the U.S.
economy. Benefiting from outsize gains in the stock and housing markets over
the past several years, they are accounting for a larger share of consumer
spending -- the principal driver of economic growth -- than ever before.
And much of their spending is going toward higher-priced services like
travel, health care and entertainment, putting further upward pressure on those
prices -- and on inflation. Such spending is relatively immune to the Federal
Reserve's push to slow growth and tame inflation through higher borrowing
rates, because it rarely requires borrowing.
Affluent older Americans, if they own government bonds, may even be
benefiting from the Fed's rate hikes. Those hikes have led to higher bond
yields, generating more income for those who own such bonds.
The so-called "wealth effect," whereby rising home and stock values give
people confidence to increase their spending, is a big reason why the economy
has defied expectations of a sharp slowdown. Its unexpected strength, which is
contributing to stickier inflation, has forced a shift in the Fed's plans.
As recently as March, the Fed's policymakers had projected that they would
cut their benchmark rate three times this year. Since then, though, inflation
measures have remained uncomfortably high, partly a consequence of brisk
consumer spending. Chair Jerome Powell made clear recently that the Fed isn't
confident enough that inflation is sustainably easing to cut rates.
When the Fed meets this week, it is sure to keep its benchmark rate
unchanged at a 23-year high, the result of 11 rate hikes. The Fed's hikes have
forced up borrowing costs across the economy -- for everything from home and
auto loans to credit cards and business loans.
Even as the Fed has jacked up borrowing costs, stock and home values have
kept rising, enlarging the net worth of affluent households. Consider that
household wealth grew by an average of 5.5% a year in the decade after the
2008-2009 Great Recession but that since 2018, it's accelerated to nearly 9%.
Stock prices, as measured by the S&P 500 index, are about 72% higher than
they were five years ago. Home values soared 58% from the end of 2018 through
2023, according to the Federal Reserve.
All told, Americans' wealth has ballooned from $98 trillion at the end of
2018 to $147 trillion five years later. Adjusting for inflation, the gains are
less dramatic, but still substantial.
"People have had significant wealth gains in stocks, significant wealth
gains in fixed income, significant wealth gains in home prices, significant
wealth gains even in crypto," said Torsten Slok, chief economist at the Apollo
Group, an asset manager. "All that adds up to still a very significant
tailwind."
The gains are hardly universal. The wealthiest one-tenth of Americans own
two-thirds of all household wealth. Still, wealth for the median household --
the midpoint between the richest and poorest -- rose 37% from 2019 to 2022, the
sharpest rise on record since the 1980s according to the Fed, to $193,000.
Wealth is also disproportionately held by older Americans. People ages 55
and over now own nearly three-quarters of all household wealth, up from 68% in
2010, according to the Fed. In percentage terms since the pandemic, household
net worth has also surged for younger households. But because younger adults
started from a much lower level, their gains haven't been anywhere near enough
to keep pace with older Americans.
"The baby boomers are the richest retiring generation we've ever had," said
Edward Yardeni, president of Yardeni Research. "Not everybody is well-off, but
we've never had a retiring generation with this much wealth. That's one of the
major reasons why the economy is strong."
That said, many older Americans face significant financial challenges.
One-quarter of Americans over age 50 have no retirement savings, according to a
survey by the AARP.
Even so, as the huge baby boom generation has aged and, on average, has
accumulated more assets, they have accounted for a rising share of consumer
spending. Americans ages 65 or over supplied nearly 22% of consumer spending in
2022, the most recent year for which data is available. That's the highest such
figure on records dating to 1989, up from about 16% in 2010.
One result of the Fed's higher rates has been a kind of bifurcated economy,
by age. Older, wealthier Americans who already own homes and cars have been
much less affected by the Fed's rate hikes. By contrast, younger Americans are
enduring a combination of expensive home prices and high mortgage rates, making
it much harder to buy a first home.
Harris, for one, sees this divide in her own family: Her home and car are
paid off, and higher interest rates have had little effect on her finances. She
recently visited a home in her neighborhood that she was surprised to see
priced at $500,000. She bought hers, which she thinks could fetch a higher
price, for $162,000 in 1991.
Her 25-year-old daughter, Ruby, had a vastly different experience during a
recent visit to an open house near her boyfriend's apartment in the Boston
area. An older two-bedroom apartment was on sale for $800,000; it sold within a
week.
Ruby considers herself fortunate to have a well-paying job as a materials
engineer. But that apartment price still seemed astronomical. She loves the
area, especially for its walkability, but doubts she'll ever be able to afford
a house there.
"In the long term, it probably won't be affordable to stay here," she said.
"Whereas the Midwest is more affordable but won't have the neighborhoods that I
like."
Economists calculate that while the wealth effect generally has a relatively
modest effect on spending, it may be larger now. That's because retirement-age
Americans, who are more likely to spend out of their wealth, constitute a
larger proportion of the nation: Americans ages 65 and over make up about 17%
of the population, up from 13% in 2010. And people with stock holdings can now
easily access their account balances online, increasing their awareness of
increases in their net worth.
Research by Michael Brown, an economist at Visa and others has also found
that significant stock market wealth typically boosts spending on discretionary
items such as restaurants, travel and entertainment -- sectors of the economy
where spending is surging and inflation remains elevated.
The Conference Board, a business research group, asks Americans in its
monthly survey of consumer confidence whether they plan an overseas vacation in
the next six months. Slok noted that more than one in five households say they
are -- a record-high proportion on records dating to 1967.
The cruise provider Royal Caribbean just reported blowout earnings and
strong demand, "leading to higher pricing for all our key products," CEO Jason
Liberty told investors. "Customer sentiment remains very positive, bolstered by
resilient labor markets, wage growth, stabilizing inflation and record-high
household net worth."
Last week, the Fed's preferred inflation gauge, excluding volatile food and
energy costs, rose 2.8% from a year earlier, a sign that inflation remains
sticky. Solid consumer spending, particularly on services, was one key factor.
In one measure of services inflation that the Fed watches closely, prices
climbed 3.5% from a year earlier, far higher than is consistent with its 2%
inflation target.
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