What Economists and the Fed Don’t Get About the Economy

Harry_headshot-150x150I often get pegged as an economist, but if you’ve listened to me speak, you know that I don’t consider myself one.

That’s because economists think you can come to conclusions about the economy by following economic and monetary policy that pours out of Capitol Hill or the hallowed halls of the Federal Reserve.

How convenient.

Try as they might to manipulate the economy, the Fed does not fundamentally control the economy.

Most economists don’t understand that… but unfortunately, that approach has come to dominate and define their field, which is why I draw a distinction between myself… and them.

As I explained on Monday, we’ve developed a number of cycles at Dent Research, but the one we’re most known for — and the one that remains at the top of my hierarchy — is demographics, the predictable things people do as they age.

Spending is a big part of our demographic research. And it’s not just a broad wall-to-wall mural that we look at. Instead, 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.

As we age, everything about us changes — even things like calorie intake, height, and weight, which peak at age 14, 19, and 60 respectively.

I’ve even found that the propensity to innovate, as well as the way power is distributed across society, relate to age.

The younger generation tends to be more innovative as they’re more familiar with current technological advances. This peaks at around age 22. The older generation, however, holds most of the power, especially at age 64 when their net worth and workforce participation peaks.

Young people tend to be inflationary since they “cost everything and produce nothing.”

Older individuals, on the other hand, are deflationary as they downsize virtually everything. They reduce food intake, spending, driving, and even downsize their homes.  They even lose weight and inches in height… it’s inevitable.

The serious saving begins when people hit their mid-to-late 40s. But by age 64 on, they begin dipping into their vault and start spending down those savings. Statistics show they stop earnrning and retire on average at 63.

Obviously we’re interested in these big picture developments — when people enter peak spending, retire, etc. — but we’re interested in the microscopic details, too.

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. We collected enough data to create 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 five-year units.

When we were able to pinpoint the exact peak, it was age 46… as past correlations had already suggested.

But we also noticed a plateau in this version of the consumer cycle of spending that landed between the ages of 39 to 53. See the chart below:

ENM April 1

Spending rises rapidly into age 39 as the rate at which people buy homes climbs. Spending first slowed down — and with it, economic growth — when the baby boomers first hit that plateau in 2000. Eventually, it peaked at age 46 in 2007… bringing our next key turnrning point to late 2014, when the boomers reached age 53 and the plateau finally started to drop off.

There are two factors driving this plateau from 39 to 53. First is that affluent people peak in their spending later than 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 — they were riding on the coattails of a generation’s peak spending. Economists who expect this improving trend to continue will be disappointed.

Those boomers who were bornrn in 1961 — right at the peak of their generation — turnrned 53 last year, meaning they’ve already stepping off that plateau. The economy may look good right now, but as their spending continues to taper, expect a different picture.

That brings me to the second factor driving this plateau: major consumer durable goods. Cars, houses, furnrniture… they all follow a similar trajectory.

Of course, the Fed has no idea that the sale of these goods follows this same plateau, and they’re certainly not tracking the way that affects the economy.

They don’t know that 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.

They don’t know that home buying has a dual peak at age 37 and 41, or that it slows down in between those two peaks at around age 39. They don’t know that furnrniture peaks at age 46, which it did right around 2007, or that automobiles peaked in 2014 as the boomers turnrned 53.

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 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 already peaking, and they’ll continue to spend less as we move through 2015 into 2016.

While most economists are predicting growth of 3% to 4% this year, extrapolating trends as always, we’re keeping an eye on how the tapering of quantitative easing will impact us… as the baby boom generation continues to fall off the final demographic cliff at age 53, and auto sales start diving like home sales did back in 2006.

Don’t get caught off guard. No one’s going to see this coming… except you, and you’ve already covered your bases.

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