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The human suffering from the coronavirus has been devastating. In economic terms, the deep hole it leaves behind will take time to heal, with multiple industries being disrupted and many workers being displaced. As we consider the path of recovery, it is worth noting that two powerful forces are beginning to lift the medium-term prospects for the US economy. The first is better productivity, which I wrote about in a prior note (and will write more about as I contemplate the post-COVID-19 economy.) The second force, which is my focus here, is growth in the all-important prime worker population (ages 25 – 54). As Figure 1 shows, growth in this population cohort has been declining for the better part of the past three decades. But it has gradually improved in recent years and appears set to keep growing for the next decade, powered by the millennial generation (those born between 1981 and 1996, as defined by Pew Research).
A boost for the labor force and the housing market
While the aging of the US and global populations, as measured by the size of the 65+ age group, is a given, the growth in the US prime worker group provides reason for optimism, since this cohort is a major driver of labor-force growth. Specifically, if there are more people in this age group and they are working or seeking work, the US labor-force participation rate, which has been among the lowest in the developed world, could rise and help generate higher growth in the economy. Before the coronavirus brought an abrupt end to the previous expansion, the labor-force participation rate of women in the prime worker cohort had risen to levels last seen in 2000. Most encouragingly, the 25 – 34 year-old female participation rate had hit a new record high.
Having surpassed the size of the baby boom generation in 2019, millennials are entering the age group that has historically corresponded with household formation and growing income and spending. In particular, millennials are set to dominate the 35 – 44 year-old age group over the next decade — the ages during which the homeownership rate (and, correspondingly, mortgage debt) jumps noticeably, to 60% from just 38% among those younger than 35 (Figure 2). In 2019, first-time home buyers (primarily the millennial generation) accounted for almost 40% of all single-family home purchases.1
Somewhat encouragingly, as the coronavirus lockdown has gradually been lifted, one of the bright spots in the economy has been the rise in new-home sales and mortgage applications. As the millennials mature in coming years, their focus will likely shift from first-time home purchases to second-time home purchases. This could be a tailwind that helps extend the housing cycle for some time (this includes homeownership but also spending on household appliances, furnishings, and related home spending). It’s also worth noting that the 35 – 44 year-old age group tends to ramp up spending in areas like food, entertainment, and leisure (while spending less on rent and education).2
Implications for the economy, the markets, and the election
All else being equal, the rise of the younger prime worker population suggests a less deflationary impulse within the economy as incomes and spending start to rise (Figure 3). The median weekly income of the 35 – 44 year-old age group is 20% higher than that of the 25 – 29 year-old age group (the biggest jump in incomes — by 40% — occurs when workers move from the 20 – 24 year-old cohort to the 25 – 29 year-old cohort).3 This shift in population, combined with the rising number of retired baby boomers, also suggests that the ratio of spenders (ages 20 – 39) to savers (ages 40 – 59) within the US population is poised to turn around (spenders tend to devote a large percentage of income to discretionary areas while savers tend to set aside part of their income in financial and retirement assets).
This slow-moving force will eventually matter in financial markets, where the savings glut has been one factor behind low bond yields. To the extent that the digitally savvy and better educated millennial generation becomes more dominant in the labor force, productivity could also get a boost.
Finally, the rising importance of this segment of the population could play a role in the upcoming election. The greatest support for the progressive left wing of the Democratic Party comes from the youngest cohorts in the US voter population. High student debt, a slow start in the labor market, and a slow rise in homeownership may help explain why this generation is far more focused on social concerns, including income and wealth inequality. To cite just one example, Federal Reserve data shows that at the end of 2019, baby boomers owned roughly 50% of real estate assets, while millennials owned just 4%. Some of the proposals being shared by the Democratic Party — refinancing of student debt, free community college for two years, continued forbearance on rent — suggest the possibility of wealth redistribution that could end up favoring the millennials.
1Source: Genworth Mortgage Insurance. | 2Source: Author calculations using Bureau of Labor Statistics data from the Consumer Expenditure Survey. | 3Source: Bureau of Labor Statistics and author calculations.