Goldman Sachs Research Newsletter

Fortnightly ThoughtsIssue 107Older borrow ersM edian value of credit card debt for households in the US by agegroups (thousands of dollars)201020134.03.53.02.52.0Taste shiftsWhere Xers are spending more relative to Boomers is thefollow ing: eating out, mortgages and other housing costs, personalservices, education and apparel. Why this is so is a mixture oftastes and priority shifts e.g. the importance they attach to theirchildren and also eating out as an experience, but also some of it isimposed by price inflation w hich applies to things like property andeducation costs. For instance, education costs in the US have risenby 3.8% pa over the last 10 years and by 5% pa over the last 20years. This enforced shift leaves less for other things and there isevidence that Gen-X is shying aw ay from some Boomer ��74Source: Federal Reserve.Given that Xers w ill have greater responsibility for their ow nretirements, they need to increase their savings rate. It also seemslikely that retirement w ill be delayed as is happening now for theBoomers (65 participation rates in the US have gone up from14.4% in 2004 to 18.6% in 2014. The US Bureau of LaborStatistics also projects that it w ill go up to 21.7% by 2024). To addto this, the age dependency ratio, w hich is the number of peopleover the age of 64 compared to the w orking age population, w asas low as 15% in 1960 and is now at 22% in the US, implying thatXers w ill receive less from the government during their retirement(net of their taxes) versus the Baby Boomers.Boom ers vs. XersShare of total consumer expenditure in 2015 and % of US population,by generation30%OthersInsurance25%Personal careEducation20%Social media usageXers are a hybrid of M illennials and Boomers w hen it comes tosocial media. Today’s Gen-X have the same social mediapenetration rates as M illennials did 5 years ago, w ith the catch-upbeing fastest for older Gen-X (see chart on page 5). This hasimplications for how to communicate w ith Xers as they still usetraditional media e.g. TV, but are increasingly active in social mediaas w ell.Pragmatism and resilienceThe next chart show s some of the key attitudes of Gen-Xcompared to other generations. In our interview w ith Neil How e onpage 6 w e discuss his theory of generational turnings; how eachgeneration is shaped by the prevailing economic conditions andsocial attitudes, but also by w hat’s gone before and in particulartheir parents. The increase in spending on their children by GenXers’ parents can be seen as a reflexive response to the relativelylittle time and money Gen-X had spent on them. The attitudes ofresilience and pragmatism w ith a lack of idealism that Gen-Xdisplays is not surprising in Neil’s generational context but it doeshave implications for w hat sort of leaders Xers are and w ill be. Hisansw er? Xers w ill make good leaders for the challenges of thew orld they find themselves living in (spoiler alert he believes w eare in a crisis phase w here Xers’ pragmatism w ill be critical). And ifnot as leaders then they are clearly important in choosing leaders.Also, Alec Phillips explores the role of Xers in the forthcoming USelection on page 14.Communication15%HealthPew survey: What makes your own generation unique?TransportSilentGen XRecreation & leisure5%Values/MoralsWork ethicHonestSmarterWWII, DepressionRespectfulSmarterConservativeWork ethicTechnology useBoomerApparelSmarter"Baby Boomers"Values/MoralsRespectfulWork sic/Pop cultureTechnology useCommunication0%% ofconsumptionGen X% of USpopulation% ofconsumption% of USpopulationFood and non-alcoholic drinksBoomersSource: BLS.The consumption sw eet spotThe reason that this matters is that peak consumption by anindividual is in the band of 45-54 years old in the US and is higher inthe UK at 30-49 years old. We estimate that Gen-X is responsiblefor over 25% of US consumption currently. That show s theirdisproportionate economic importance. Therefore they reallymatter. So, even though they are smaller than the Boomers theyare still a key demographic to target or sell to, but as see DrewBorst’s piece on advertising argues M adison Avenue dedicateslittle of its collective time to them.Goldman Sachs Global Investment Research0%5%10%15%20%25%Source: Pew Research.3

Fortnightly ThoughtsIssue 107Surprisingly, w hen w e look at the distribution of European and USCEOs by age, European CEOs are slightly younger. The medianage for the US is 57 meaning that Gen-X isn’t running the C-suiteyet, but w ill be soon. What their more parsimonious proclivities w illmean for capex, M &A and cost cutting remains to be seen.didn’t last long e.g. American Eagle Outfitters and its M artin Osastore chain, Gap w ith Forth & Tow ne and Abercrombie & Fitch w ithRuehl No. 925. The M illennial disdain for established brands isoften debated, but it’s a similar story w ith Gen-X, raising risks tocompanies supplying high-ticket consumer goods.Boom ers run the C-SuiteOne final thought around the Xers is the broader demographicbackdrop. When w orking age populations as a percentage of thetotal shrink it has typically been seen as a headw ind for economicgrow th and grow th in savings. As countries age they typicallyexperience low er grow th and low er risk appetites w hich can haveimplications for how much and how people invest.Age distribution of S&P500 and STOXX600 CEOsS&P 500STOXX 60050No. of companies4030Extrapolating?Share of 36-51 population in the US vs. real S&P 500 performanceAges 36-51 as a % total population (LHS)20S&P500 price (real)25%2,50024%1023%2,00022% 64656667686970717273 740YoungerGeneration XOlder Generation XBaby BoomersSource: Bloomberg.21%1,50020%19%1,00018%Goldman Sachs Global Investment 19811979197719750197315%1971Gen-X and investment implicationsGen-X is not usually a generation that is specifically targeted bybrands and it is a difficult generation to sell to as they are a mixbetw een analog and digital. This is w hy Drew Borst highlights thatTV advertising is still effective w ith this cohort on page 13. Theyare also a more conservative, frugal generation, reflecting our USanalysts’ argument that they spend less on cars versus theirBoomer parents (page 12). Focusing on w hat they spend on, eithermore or less relative to the Baby Boomer generation reveals boththe differences in priorities and economic conditions; many of thethings they consume disproportionately more revolves around thefamily – children, housing, appliances, apparel and travel. Thereforethe outlook for Gen-X matters most to sub-sectors like homeimprovement, autos, consumer durables, apparel and leisure. It isparticularly important to understand w here their tastes, and thevalue they place on brands, have and could change. There is ahistory of companies launching brands targeting this age group thatSource: Robert Schiller, UN.4

Fortnightly ThoughtsIssue 107Six generational chartsThe first four charts depict economic conditions in the US and the UK w hen the differentgenerations entered their formative yearsUnexceptional grow thHard to saveUS real GDP grow th yoyUS savings as a percentage of real disposable incomeSilentBaby BoomersGen 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 rce: Federal Reserve.Source: Federal Reserve.M ore dow ns than upsBeing thereUS real disposable income grow th yoySilentGenXBoomersUK house prices, 1420353637383940Age41AgeSource: Federal Reserve.Source: ONS.The hybrid generationA step dow n% of people having a social media profile by age groupM edian w ealth of US families, US 2014100,0002015403050,00020100 40025-3435-4445-54Source: Pew Research.Goldman Sachs Global Investment Research40-61 6255-64Source: Federal Reserve.5

Fortnightly ThoughtsIssue 107Interview w ith.Neil How eNeil How e is a renow ned author and speaker on economic, demographic, and social change inAmerica. He is the nation’s leading authority on today’s generations: w ho they are, w hatmotivates them, and how they w ill shape America’s future. How e coined the term “ M illennialGeneration” and has w ritten over a dozen books on generations, many of them w ith WilliamStrauss, including Generations and M illennials in the Workplace. How e is currently a seniorassociate at the Center for Strategic and International Studies and the Global Aging Institute.Can you give an overview of yourgenerational theory and the place ofGen-X within that?First, let’s define w hat a generation is. It’sa group of people born over a span of about20 years or so, w ho share common beliefs,attitudes and behaviours. They also share a common age locationin history. For example, the G.I. Generation came of age during theGreat Depression and World War II, w hile Boomers (roughly half ofw hom w ere literally children of the G.I. Generation), came of ageduring the mid-‘60s to the early ‘80s, a time of tremendous turmoiland upheaval in societal conventions. The G.I.s w ere shaped by DDay and one of the major national crises in American history.Boomers w ere shaped by Woodstock and one of major aw akeningeras of American history. Small w onder they turned out sodifferently.Gen-Xers w ere the children of that aw akening period, w hich isinstrumental in understanding their behaviour. Throughout history,generations born during Aw akenings, w e call them “ Nomads” ,grow up amid social and cultural upheaval. They are generally lefton their ow n by adults w ho are busy trashing old norms andexploring new values. Xers started coming of age themselves asadults after the Aw akening ended in the early Reagan years.The generation follow ing Xers w as M illennials, w ho benefited froma large-scale shift tow ard child protection in early-‘80s America.This w as a far cry from Xers’ childhood as latchkey kids. In fact,hands-off childrearing, the sort that Xers experienced, is oneaspect of being raised in an Aw akening era, something thatNomadic generations typically experience as children.Let’s also take a look at the other kinds of generations. Apart fromNomads, w e define three other archetypes in our theory: Heroes,Artists, and Prophets. Hero archetypes are born after Aw akeningsand are raised at a time of increasing protectiveness tow ardchildren, for example the G.I. Generation, The Silent Generation isof the Artist type, w hich is raised during a Crisis era. Prophets, likethe Boomers, are raised just after the end of a Crisis era, w henchild rearing becomes more indulgent.A generation can also be defined based on w hat it missed. Eventhe oldest of the Silent missed any memory of the RoaringTw enties; their earliest childhood experiences w ere of the GreatDepression. Boomers just missed World War II. Gen-X missed theAmerican High and cannot recall the w atershed moment ofKennedy’s assassination. Finally, even the oldest M illennials can’trecall any of the social and family experimentation of theConsciousness Revolution, nothing before “ Baby on Board”bumper stickers and new “ family values” moral panic over thew elfare of children.Can you talk about some of the factors that have shapedbehaviour for Gen-X?Goldman Sachs Global Investment ResearchConsider the childhood environment w hen Gen-X first arrived in theearly ‘60s. It w as a time w hen divorce rates accelerated, fertilityrates plummeted and schools no longer seemed to w ork. The oldjoke is that Xers are the first generation people took pills not tohave children. There w as a society-w ide hostility to children duringthis period, they w ere an annoyance and, w ell, w e all knew (fromreading the “ Population Bomb” ) that there w ere w ay too many ofthem, anyw ay. M any of the most popular movies of the time, likeRosemary’s Baby, The Exorcist, and The Omen depicted evilchildren.While their parents w ere busy trying to discover themselves, Xerchildren w ere left w ith latchkey guides to take care of themselves.Ebbing confidence in institutions meant that kids trusted nothingand nobody, giving rise to this generation’s trademark cynicism andresilience. From early on, they understood that focusing on thebottom line w as more important in life than ideals. Thismaterialistic focus show s up in the pop culture of the Xer teen eraw ith songs like M adonna’s “ M aterial Girl.”Likew ise, a UCLA college freshman survey running since 1967 hasasked fresh students around the country w hether it is moreimportant to develop a meaningful philosophy of life or to befinancially w ell off. The ratio of responses in favour of a meaningfulphilosophy of life had been around 3:1 to 4:1 until the late ‘60s,w hen Boomers w ere still freshmen, but in the mid- to late ‘70sshifted in favour of being financially w ell off by a ratio of about 2:1.Of course, since every generation spans roughly 20 years, thereare differences betw een “ first w aves” and “ last w aves” of thesame generation.For example, the first w ave of Xers born in the ‘60s came of ageduring the Reagan years. They prioritize self-sufficiency, thebottom line, and a scathing (anti-Boomer) scepticism tow ard grandideals. They are also very attached to individualism, free agency,and deregulation. In fact, people born in the ‘60s are actuallyamong the most partisan birth decade born in the 20th century.Fully 63% of all Americans w ho are born betw een 1961 and 1971and w ho have ever served as a U.S. governor or a member ofCongress are Republican. (This imbalance is outmatched only bypeople born in the 1910s, w ho came of age at the height of theGreat Depression and w ho later leaned very heavily Democratic.)But as w e move to the last-w ave Xers born in the ‘70s, w e see aclear shift tow ard being more Democrat-aligned. And so, evenw ithin the same generation, w e meet contrasts like w e see w ithXers: the Reagan versus the Clinton w ave; or the Atari versusNintendo w ave.Today, first-w ave Xers are reaching (belatedly) the age of nationalleadership. And just look at the 2016 primary race. While on theRepublican side, w e saw many prominent Gen-X names, includingPaul Ryan, Chris Christy, M arco Rubio, Nikki Haley, Bobby Jindal,and Scott Walker, there w ere barely any Gen-X candidates on theDemocratic side. The average age of Republicans in Congress has6

Fortnightly Thoughtsalso been declining substantially over the past few years as Xersmove into leadership positions, w hile on the Democratic side, theaverage age continues to rise.Given the socio-economic circumstances that they have faced,do you think Xers consume differently versus previousgenerations?To understand the effects of generational shifts on consumption,w e need to consider three factors: the demographic volume ordensity of their birth cohorts, their spending pow er, and theirattitudes.Population density increases as w e go from first-w ave to last-w aveBoomers, born in the late 1950s. It decreases rapidly again in themid-1960s, w hich gave rise to the term “ baby bust” to describemost of Generation X.To be sure, some of the population decrease attributable to thefertility decline w as made up for by heavy immigration. In fact,Gen-X is the largest immigrant generation (not just in absolutenumbers, but per capita) of any generation born in the 20thcentury. Yet overall, the population pyramid today still show s ahuge bulge at the top made up of Boomers, an inw ard Gen-X bustcrescent further dow n, then a second bulge of M illennials in youngadulthood. The peak M illennial birth years are 1990 and 1991,w hich forms another outw ard protruding bulge.Over the next fifteen years, the crescent indentation comprised ofmid- to late-w ave Xers w ill be moving up as they get into their 50sand 60s, causing sizable declines in the number of people in thisage group. On the other hand, w e w ill get a lot more people in theirlate 30s and early 40s. Implications? Keep in mind that the mid-lifeage bracket historically constitutes a large chunk of all consumersof the highest profit-margin goods and services, be it cars, houses,boats, appliances, or vacation homes. This is the “ luxury” bracket.Declining numbers per cohort in this high-margin age bracket w illput plenty of stress on corporate income statements, w hosemargins right now are already eroding.But that’s not all. Not only w ill numbers decline in this age bracket,but per-capita ability to spend as w ell. As Xers move into midlife,w e’re going to see in this age bracket a sizable drop in medianhousehold net w orth. Their incomes w ill be constrained, and theirpurchases w ill be further constrained by their desperate need tosave more before they retire. In short, w e’re going to see, finallyand at the prime of life, that much-heralded reversal in upw ardgenerational economic mobility that economists have for so longtalked about.So it is true, then, that Gen-Xers represent the firstdownwardly mobile generation in the economy?Almost. It’s more accurate to say they are the first full generationto experience a significant decline in real median household netw orth w hen compared to the prior generation at the same age.Cohort by cohort, w hen you look at the data, the dow nturn actuallystarted a bit earlier. It started w ith late-w ave Boomers, those bornin the mid- to late-1950s. Compared to first-w ave Boomers, theyw ere hit much younger by the turmoil of the ‘60s and came of ageat an unluckier economic moment, not the go-go late ‘60s, but thestagflation late ‘70s. They w ere more numerous, w hich bid dow nentry-level w ages. And they w ere less w ell educated by almostevery measure. College completion rates declined, particularly formales born in the late ‘50s. From first w ave to last, Boomer SATscores fell for 17 consecutive years, reaching an all-time low forthe birth cohorts of 1960-61.Goldman Sachs Global Investment ResearchIssue 107By the time Xers came along, the ‘80s recovery had brought newjob grow th, but also rising interest rates for student loans andmortgages. Further, w hen the Rust Belt w as being disbanded oroutsourced in the ‘80s, w e saw the introduction of tw o-tier w agesw here only older w orkers w ould have their w ages preserved. Thistoo w as unprecedented, and the only w ay Xers could get aheadw as by spurning institutions that protected older incumbents andrelying instead on themselves. These circumstances really shapedtheir collective persona. Unlike Boomers, they didn’t bemoan theinjustice of their fate or hide behind a toney yuppie façade. Xersgot to w ork, took chances, and never assumed that anyone w asthere to look after them.Along the w ay, Gen-X has become the most spread-out generationin terms of income and w ealth distribution. The combination oferoding youth safety nets, a disappearing middle class, highimmigration, a tough childhood, and free agency has shaped theGen-X mindset. They w ere considered hopeless slackers, andmany Xers took this to heart. They knew that they w ould never beadmired as a group by older people. They also knew (and w ereconstantly told) that most of them w ould never inherit theAmerican Dream. So naturally, few of them had much interest inidentifying w ith their generation. They embraced a maverickoutsider role, and cultivated their individuality. Each Xer hoped tobe the exception, the one w ho broke the odds and turned out aw inner. All this stands in stark contrast w ith M illennials. Whileyoung M illennials have the collective confidence that they’re allsomehow going to get ahead, that w asn’t the case w ith youngXers, w ho alw ays suspected (to use the Wayne’s World line) that“ w e are unw orthy.”Tw o other w atershed events that shaped Generation X w ere thebig market crashes: the dot.com bubble burst and the crisis of2008. The latter w as a real call of reckoning for this generation. Thedrop in median household net w orth from 2007 to 2010 in the GenX age bracket far exceeds that of any other generation. Young-adultXers bought late into the stock market and late into the real-estatemarket. And in real estate they typically bought into exurbanlocations w here the prices fell the fastest. So yes they w ere thebiggest losers. By 2010-11, Xers w ere far more likely than othergenerations to be underw ater on their mortgages, w hich remainstrue today. To some extent, Xers still remain trapped in houses thatcost too much, in student loans they’re still paying off, and in anincome-asset-debt vice that is hard to escape in the absence ofsignificant inflation. In the w ake of the Great Recession, w e haveseen the emergence among Gen-Xers of w hat I call the “ newfrugality.” M illennials, traumatized by seeing w hat debt had doneto Xers, have become so averse to debt for this very reason. Apartfrom student debt (here M illennials feel they have no choice) everyother form of debt (credit c

Jul 13, 2016 · amount of credit card debt for 34 Smaller but important from 2010 to 2013. But fo The Xers are a smaller cohort than the Boomers or the Millennials at 62 mn members versus 73 mn and 75 mn in the US, whereas Europe is slightly different in that Xers are smaller than the Boomers,