Pent-up fortunes of baby boomers

It’s hard to predict business cycles, just ask the experts. For more than a year now, Wall Street economists, billionaire investors and even former Federal Reserve officials have repeatedly predicted an impending economic downturn. But so far, the labor market and consumer spending have remained resilient, inflation is slowly fading, and first-quarter GDP growth has just been revised to 2%.

Many have been surprised by the ability of the economy to weather constant headwinds over the past few years, from rising interest rates and the war in Ukraine to high inflation and banking instability, but not Edward Yardeni. Back in June, veteran market watcher and founder of Yardeni Research said Bloomberg that despite Wall Street concerns, a recession was far from “inevitable” and that inflation would come down. And in January this year, he said the outlook for the global economy was “improving” in a follow-up interview.

While some economists are warning that consumers are spending the extra savings they’ve accrued during the pandemic, which could mean the long-predicted recession is simply delayed, Yardeni isn’t so sure.

“The common explanation for the no-show recession despite the 500 basis point hike in the federal funds rate is that consumers were still spending their excess savings from the pandemic. But once that money is spent for the rest of this year, a consumer-led recession is believed to be likely in 2024,” he wrote in a Wednesday note to clients. “I do not agree.”

Yardeni, an economist by training who was previously chief investment strategist at both Prudential Financial and Deutsche Bank, now points to another positive sign for the economy, one that could sustain consumer spending, which accounts for 70% of GDP. American, at a high level for years. to come despite stubborn inflation.

“The consumer savings surplus of about $0.5 trillion is currently dwarfed by the net worth held by retiring baby boomers,” he explained. “They just started spending it. Their offspring undoubtedly expect to inherit some of this wealth and may therefore save less.

Baby boomers, defined as those born between 1946 and 1964, had a net worth of $74.8 trillion at the end of the first quarter. Nearly $19 trillion of this wealth was held in real estate, including personal home equity. But Yardeni said baby boomers have “most” of their excess savings “parked in liquid assets,” including $8.9 trillion in bank deposits and money market funds alone, which should help them to keep spending even in a slowing economy.

It’s not just baby boomers who have cash in hand, either. The Silent Generation, which the Fed defines as those born before 1946, had a net worth of nearly $18 trillion in the first quarter. And the overall net worth of Americans has increased by 34% in the past three years alone, from $104.2 trillion in the first quarter of 2020 to $140.6 trillion in the first quarter of this year.

Yardeni noted that in addition to “rapidly rising wages and salaries,” Americans have been able to leverage their growing net worth to earn some serious passive income. In the first quarter, US consumers recorded interest income of $1.8 trillion, dividend income of $1.7 trillion, homeowners’ income (income from owning a business) of $1.9 trillion. billion, rental income of $0.9 trillion and Social Security income of $1.3 trillion, according to data from the Bureau of Economic Analysis.

“Consumers could exhaust their excess pandemic savings by the end of this year, but they have plenty of other sources of purchasing power,” Yardeni said of the data.

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