An Economy Powered By the People

Harry Dent |

Who knows most about the economy? Everyday people. That’s who knows the most about an economy.

I always say that economists don’t understand the most important thing about our economy. It’s not money, stocks, companies or banks.

The most important part is simple: people.

It’s you and me.

There are many crystal clear cycles most economists don’t understand — commodities, geopolitical, innovation and decennial boom/bust. Here at Dent Research, we do understand them but we’re most known for our focus on demographics — the predictable things people do as they age.

Spending is a big part of our research. And it’s not just a broad wall-to-wall mural that we look at… we prefer to look at Polaroid snapshots of every phase of life. We break it down by age group and we see it all from cradle to grave.

It’s all in the details…

As we age, everything about us changes, even things like calorie intake which peaks at age 14 on average, height at 19 and weight at 60.

I’ve found that the propensity to innovate and the power held in society relate to age. The younger generation tends to be more innovative peaking at age 22, as they’re more familiar with current technological advances — but the older generation holds the power especially at age 64 when their net worth peaks.

Young people tend to be inflationary since they “cost everything and produce nothing.” It costs $250,000 to get the average kid through high school. Then for many there’s college. Then there’s the cost for businesses to train and equip new workers at age 20 on average before they become productive. Economists that think the massive inflation of the 1970s was caused by government and oil prices missed the impact of the massive baby boom entering the workforce.

Older individuals are deflationary as they downsize virtually everything. They reduce food intake, spending and even driving. With no effort at all, their physical appearance changes and they lose weight and lose inches in height… it’s inevitable.

They often move to smaller homes when the kids leave the nest or when one of them dies.

When they hit their mid-to-late 40s, they start serious saving and begin dipping into their vault and start spending down those savings from 64 forward. Statistics say they stop earning and retire on average at 63.

So where are we today?

There is one simple graph that summarizes the impact of consumers on our economy.

 

I explored this spending premise in my first book, Our Power to Predict where I featured a graph that we’ve used for looking at 5-year cohorts dating back to 1989. It showed a peak in spending in the 45- to 49-year-old followed by a steep decline.

How do we look back at the previous patterns and apply them to today?

In order to focus on individual spending segments more effectively, we took 10 years of the Consumer Expenditure Survey from the U.S. Bureau of Labor to get enough data to get accurate charts on hundreds of sectors of consumer spending from diapers to nursing homes.

There was another benefit to this in-depth research into the consumer: we could more accurately plot the total spending cycle by year, not just by 5-year cohorts. When we were able to down the exact peak, it was age 46… that had already been our assumption for decades as that was where the correlation with the economy was the best.

It’s important to note that in this version of the consumer cycle of spending, we saw a plateau that landed between the ages of 39 to 53. Spending rises rapidly into age 39 as home buying is surging. Economic growth first slowed down when the baby boomers first hit that plateau in 2000. Stock prices adjusted for inflation have made little progress ever since.

The key turning points in our economy occurred in 2000 when spending first slowed down and then peaked at age 46 in 2007… bringing our next key turning point to late 2014, the last year of this long plateau at age 53.

There are two factors driving this plateau from 39 to 53. First is that affluent people peak in their spending later than the average or below average. While the average person peaks at 46, the most affluent go to school longer, as do their kids.

This is one of the biggest reasons why the Fed’s money printing in late 2008 worked to a moderate degree up until now. Economists who expect this improving trend to continue will be disappointed.

The peak baby boomers born in 1961 are age 53 this year and right at the end of this plateau before spending tapers off rapidly and it’s one of the reasons why the economy looks so good right now.

According to our demographic research and to quote Jack Nicholson: “Maybe this is as good as it gets.”

Let’s delve a bit further into the numbers.

Cars over $50,000 are up 31% vs. 4% for cars under $50,000 because the more affluent dominate car buying in their early 50s. That brings us to the second factor driving this plateau: major consumer durable goods.

On the other hand, home buying has a dual peak at age 37 and 41. On average, home buying slows down in between those two peaks at around age 39. That’s a big deal and it hits its apex before their income hits its high by several years.

At 46, spending on furniture peaks (the next big durable goods area). Those numbers are comparable to 2007. The last to peak is automobiles at age 53 right now in 2014.

These are big-ticket items and the very ones that are most financed with debt. They’re the most leveraged in the consumer spending cycle.

The Fed has no clue that auto sales are very likely to peak right here, neither do the car dealers. They have no idea that the more affluent consumers that have continued to spend and benefit from quantitative easing (keep in mind that these households own over 90% of stocks and financial assets) are getting ready to peak and spend less as we move into 2015, especially in 2016.

Most economists are predicting growth of 3% to 4% next year, extrapolating trends as always.

Yeah, good luck on that.

So, let’s see how quantitative easing, which has been halted in the U.S. since October, works when the baby boom generation goes off the final demographic cliff at age 53 and auto sales start diving like home sales did back in 2006.

No one is going to see this curve ball coming.

But you saw it coming off the mitt… and you’ve already covered your bases.

DISCLOSURE: The views and opinions expressed in this article are those of the authors, and do not represent the views of equities.com. Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions. To read our full disclosure, please go to: http://www.equities.com/disclaimer

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