Barron's Cover
SATURDAY, APRIL 27, 2013
On the Rise
By JACQUELINE DOHERTY
A lost generation? No way! The Millennials are finally poised to start spending, which is good news for the economy and stocks.
The kids are alright. More than alright, in fact. Widely dismissed as a lost generation with few job prospects, towering student loans, and a bleak future, the so-called Millennials, most of whom have reached adulthood since 2000, could surprise America and the world in coming years with their economic might and spending power.
Industries from housing and autos to retailing and financial services could be transformed by their collective demands and desires, while their growing wealth, coupled with their doubts about the future of government entitlement programs, could usher in a new era of saving and a bull market for stocks.
Things haven't been easy for the members of this generation almost since the day musician Kurt Cobain, one of their patron saints, died in 1994. They've known two U.S. wars, mass shootings, terrorist attacks, the financial crisis, and the lean years since, which coincided for many with their graduation from college and frustrating attempts to launch themselves into adulthood and careers.
Brad Trent for Barron's
Yet the Millennials are far from the slackers the media and popular culture portray -- a generation of adult children living at home with Mom and Dad, texting away and refusing to grow up. The evidence suggests that their march up the career ladder hasn't been aborted so much as a delayed by economic circumstances and personal choice. Once they get going, however, and marrying, starting families, and moving into their high-earning years, their influence could approach that of their baby-boom parents.
FOR ONE THING, THE MILLENNIALS -- sometimes called Generation Y, and defined by many demographers as ranging from ages 18 to 37 -- make up the largest population cohort the U.S. has ever seen. Eighty-six million strong, it is 7% larger than the baby-boom generation, which came of age in the 1970s and '80s. And the Millennial population could keep growing to 88.5 million people by 2020, owing to immigration, says demographer Peter Francese, an analyst at the MetLife Mature Market Institute.
This echo-boom generation totals 27% of the U.S. population, less than the 35% the boomers represented at their peak in 1980. When the baby-boom generation drove the economy in the 1990s, growth in gross domestic product averaged 3.4% a year. As the Millennials hit their stride, they could help lift GDP growth to 3% or more, at least a percentage point higher than current levels.
The Millennials already account for an annual $1.3 trillion of consumer spending, or 21% of the total, says Christine Barton, a partner at the Boston Consulting Group, which defines this cohort as ages 18 to 34. As the economy pulls out of an extended period of sluggish growth, helped in part by this rising generation, annual growth in consumer spending is likely to revert to its long-term average of 3.5% to 4% from about 2% now. Likewise, consumer spending on durable goods could rise sharply.
The Millennial generation has already made a big mark on one industry: education. The number of students enrolled in college in the U.S. climbed by 30% from 2000 to 2011, helping to fuel a building boom on campuses across the country. But that's something many schools could regret in coming years, given the past decade's sharply declining birth rate.
Owing in part to the Millennials' surge, apartment demand is strong around the country. Housing could be the next major industry to benefit from their size and maturation, but Wall Street could reap the biggest rewards. The MY ratio, which compares the size of the middle-aged population of 35-to-49-year-olds with that of the young-adult population, ages 20 to 34, explains why.
Middle-aged folks have higher incomes than younger people, and a greater urgency to save for retirement. They invest their savings, which drives up stock prices. When the MY ratio is rising, meaning the older cohort outnumbers the younger, the stock market typically does well. The ratio has been falling since 2000, which has exerted a drag on stock prices.
Alejandra Grindal, a senior international economist at Ned Davis Research, notes the MY ratio will bottom in 2015 and then rise through 2029. It is one of several reasons the firm is bullish on stocks. According to financial-services providers, the Millennials already have started saving, spurred in part by fears that dwindling Social Security payments could make their retirements largely self-funded.
Industries from housing and autos to retailing and financial services could be transformed by their collective demands and desires, while their growing wealth, coupled with their doubts about the future of government entitlement programs, could usher in a new era of saving and a bull market for stocks.
Things haven't been easy for the members of this generation almost since the day musician Kurt Cobain, one of their patron saints, died in 1994. They've known two U.S. wars, mass shootings, terrorist attacks, the financial crisis, and the lean years since, which coincided for many with their graduation from college and frustrating attempts to launch themselves into adulthood and careers.
Brad Trent for Barron's
Yet the Millennials are far from the slackers the media and popular culture portray -- a generation of adult children living at home with Mom and Dad, texting away and refusing to grow up. The evidence suggests that their march up the career ladder hasn't been aborted so much as a delayed by economic circumstances and personal choice. Once they get going, however, and marrying, starting families, and moving into their high-earning years, their influence could approach that of their baby-boom parents.
FOR ONE THING, THE MILLENNIALS -- sometimes called Generation Y, and defined by many demographers as ranging from ages 18 to 37 -- make up the largest population cohort the U.S. has ever seen. Eighty-six million strong, it is 7% larger than the baby-boom generation, which came of age in the 1970s and '80s. And the Millennial population could keep growing to 88.5 million people by 2020, owing to immigration, says demographer Peter Francese, an analyst at the MetLife Mature Market Institute.
This echo-boom generation totals 27% of the U.S. population, less than the 35% the boomers represented at their peak in 1980. When the baby-boom generation drove the economy in the 1990s, growth in gross domestic product averaged 3.4% a year. As the Millennials hit their stride, they could help lift GDP growth to 3% or more, at least a percentage point higher than current levels.
The Millennials already account for an annual $1.3 trillion of consumer spending, or 21% of the total, says Christine Barton, a partner at the Boston Consulting Group, which defines this cohort as ages 18 to 34. As the economy pulls out of an extended period of sluggish growth, helped in part by this rising generation, annual growth in consumer spending is likely to revert to its long-term average of 3.5% to 4% from about 2% now. Likewise, consumer spending on durable goods could rise sharply.
The Millennial generation has already made a big mark on one industry: education. The number of students enrolled in college in the U.S. climbed by 30% from 2000 to 2011, helping to fuel a building boom on campuses across the country. But that's something many schools could regret in coming years, given the past decade's sharply declining birth rate.
Owing in part to the Millennials' surge, apartment demand is strong around the country. Housing could be the next major industry to benefit from their size and maturation, but Wall Street could reap the biggest rewards. The MY ratio, which compares the size of the middle-aged population of 35-to-49-year-olds with that of the young-adult population, ages 20 to 34, explains why.
Middle-aged folks have higher incomes than younger people, and a greater urgency to save for retirement. They invest their savings, which drives up stock prices. When the MY ratio is rising, meaning the older cohort outnumbers the younger, the stock market typically does well. The ratio has been falling since 2000, which has exerted a drag on stock prices.
Alejandra Grindal, a senior international economist at Ned Davis Research, notes the MY ratio will bottom in 2015 and then rise through 2029. It is one of several reasons the firm is bullish on stocks. According to financial-services providers, the Millennials already have started saving, spurred in part by fears that dwindling Social Security payments could make their retirements largely self-funded.
THE BABY BOOMERS FOUGHT IN VIETNAM -- and fought against the war there. They gave us flower power, rock 'n' roll, civil rights, The Feminine Mystique, and Bill Clinton. Having transformed the culture, they are now reinventing retirement -- as a second adolescence, but with worse knees.
Their children, who are also entering adulthood in fraught economic times, are highly educated, ethnically diverse, and team-oriented, says Neil Howe, an economist, historian, and author of several books on demographic and generational trends. They trust government, and voted for Democrats in the past three elections, sending President Obama to the White House twice.
They grew up in an era when children were rediscovered -- often in soccer uniforms in the back of a minivan. Child safety was a parental priority, and helicopter parenting became the norm in many families, facilitated by the ubiquity of cellphones, which encouraged constant communication. That alone separates the new generation from Generation X, which grew up as divorce rates soared. Gen Y, on the other hand, "is sheltered and expects to be sheltered," says Howe.
Millennial women could be a particularly powerful force in coming years, says Francese, and one that marketers ignore at their peril. They have more education than the men of their generation, and in about a third of marriages, they have higher incomes.
Above all, the Millennials are connected -- to the Internet and each other. They brought us Facebook and popularized YouTube, Twitter, and phrases like 24/7, which describes how much time they spend on the 'Net and personal electronic devices. Nielsen estimates that 74% of young adults between the ages of 24 and 34 own smartphones, up from 59% in mid-2011. According to Advertising Age, consumers in their 20s switch between communications platforms and devices 27 times per nonworking hour.
THERE IS NOTHING NEW about worrying about future generations. Chances are, even the cave parents did it. To be sure, many Millennials got a bum deal by coming of age during the great recession, but a multitude of statistics suggest their prospects are improving.
Take unemployment, which remains high for young adults between the ages of 20 and 24. Last month's 13.3% unemployment rate for this population was down, however, from January's recent peak of 14.2%.
As for those ages 25 to 34, the unemployment rate was 7.4% in March, below the national average of 7.6%, and well below 8.9% in January 2012. Dick Hokenson, an economist who heads ISI Group's Global Demographics Research team, says 25-to-34-year-olds have recovered almost 75% of the jobs they lost to the recession. "They're finding jobs; they're moving out and doing normal things," he says.
Again, the numbers tell a cautiously hopeful story. Nineteen percent of U.S. men ages 25 to 34 live with their parents, says Mark Mather, a demographer with the nonprofit Population Reference Bureau. But that is up only five percentage points from 2007. The percentage of 25-to-34-year-old women still living at home is 9.7, up from 9% in 2007.
There is almost $1 trillion of student debt outstanding in the U.S. today, which could limit the purchasing power of Millennials. "These people have a mortgage and no house," Francese says.
But here, too, total figures are misleading. The average student loan among Gen Y-ers is $25,000, and the median loan is nearly $14,000, according to the Federal Reserve Bank of Kansas City. Less than 1% of student loans are larger than $100,000.
AS THE MILLENNIALS' EMPLOYMENT situation improves, more young adults living at home will pack their bags and move out. That could spur an increase in U.S. household formation, which turned negative in 2007-08. Since then, the number of newly created households has recovered to about a million a year, still well below an annual average of 1.5 million since the 1970s, according to Census Bureau data.
Greater financial security could mean an increase in the birth rate, which typically slumps during economic downturns. Francese sees the average birth rate for U.S. women rising to 2.1-2.2 in coming years from a depressed 1.9 recently. "A lot of Millennials put off having babies, and now they will get to work," he says.
That suggests they will also start buying homes. Pat Tschosik, a consumer strategist at Ned Davis Research, figures there will be more home buyers than sellers in the 12 years ending with 2019, giving the housing market a boost.
Robert Turner of Turner Investments agrees. "We're big believers in this housing recovery," he says, noting his firm has invested in Home Depot (ticker: HD), the home builders Lennar (LEN) and Toll Brothers (TOL), and mortgage companies. "The leverage in these companies is underappreciated," he says.
The National Association of Home Builders market index has risen 163% in the past two years, an indication that the industry's sunny prospects haven't been ignored. Dennis McGill, director of research at Zelman & Associates, sees more gains ahead, and is bullish on Pulte (PHM), Toll, and Lennar. The firm also likes Home Depot and Lowe's (LOW), as well as Sherwin-Williams (SCH), Fortune Brands Home & Security (FBHS), American Woodmark (AMWD), and carpet maker Mohawk Industries (MHK).
THE MILLENNIALS ALSO could have a big impact on Detroit, which saw annual vehicle sales plummet to 10.4 million in 2009 from an average of 17 million a year in the early to mid-2000s. This year sales are likely to recover to 15.3 million, before rising gradually to 17 million in 2017, says Jeff Schuster, senior vice president of forecasting at LMC Automotive, formerly a division of J.D. Power & Associates.
Whether higher sales volumes translate into fatter profits for car makers is another matter. When the Millennials become parents, Ford Motor (F) expects that they will be looking for low-cost, fuel-efficient utility vehicles, says Erich Merkle, U.S. sales analyst at the auto maker. Ford's response, at least for the 2014 model year, is the huge and boxy Transit Connect Wagon. Retail prices for the Transit Connect are expected to start at $22,000, a few thousand dollars below starting prices for minivans such as the Toyota Sienna, a mammoth people mover favored by boomer parents.
As the generations shift, new retailers could have the wind at their backs. These include merchants specializing in children's apparel and furniture, and companies that offer value, such as Family Dollar Stores (FDO). But other concerns, with more appeal to teens and mature, high-income adults, could encounter head winds. Among them: Abercrombie & Fitch (ANF) and American Eagle Outfitters (AEO), as well as Tiffany (TIF), Nordstrom (JWN), and Coach (COH).
Macy's (M) defines the Millennials as 13 to 30 in age, and estimates that they control $65 billion in spending. Last year, the department-store retailer outlined plans to use more technology in stores and online to create a "fun" and convenient shopping experience that it hopes will attract and retain Gen Y customers. Among other things, the company will step up its use of QR codes and tap-and-go transactions.
THE GOOD NEWS FOR Wall Street is that Millennials know they need to save, and they're not afraid of stocks, which account for more than 70% of their portfolios, according to Vanguard. They are also poised, along with their Gen X predecessors, to come into some serious money as the boomers age and die. The two younger generations combined could see their wealth grow to $28 trillion in the next five years from $2 trillion now, as they earn more and claim their inheritance, says Christopher Tsai, head of Tsai Capital in New York.
Banks and money managers aiming to woo this generation must embrace technology, as Citigroup (C) is doing by opening branches with media walls that display news, local weather, and event listings. Financial advisors pursuing the Millennials need to brush up on blogging and Webcasts.
As the Millennials become parents, expect them to focus on grown-up financial products such as life insurance and college-savings accounts. In other words, it is only a matter of time before this slow-to-launch generation resembles -- you guessed it -- Mom and Dad.
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