How boomers and work-from-home changed American spending patterns

Introduction: Welcome to Eyes on the Economy by CIBC Capital Markets. A podcast series dedicated to addressing current issues in a concise format, helping to make sense of the evolving economic complexities, so that you can take action.

Ali Jaffery: Thanks for joining us on the latest edition of Eyes on the Economy. I’m Ali Jaffery, a Senior Economist at CIBC and your host again for today’s episode. Today I’m joined by my colleague, Senior Economist Katherine Judge, to talk about a piece we just released and worked on together. The note is titled The Good’s Life, How Boomers and Work from Home Changed American Spending Patterns. This was a lot of fun to work on and think about and I think a fairly obvious area of attention given the strength in US consumption. So Katherine, tell us what is this paper about?

Katherine Judge: Yeah, so the US consumer has been extremely resilient and has not showed the slowdown that we anticipated with higher interest rates. So we wanted to take a look and see why that was. The savings rate is at a very low level, and this spending is also being supported by strong gains in net wealth over the past few years. So specifically, what we’ve seen is a shift in the mix of consumption, particularly in favor of durable goods and at the expense of services. So we wanted to take a look at what was driving that and what were the implications for Fed policy with this seemingly permanent shift in preferences towards durable goods. So we narrowed it down to two main factors. So firstly you have these wealthy retirees and the baby boomer generation driving consumption. And then secondly, lifestyle changes associated with working from home is another huge factor.

Ali Jaffery: Okay, really cool. So walk our listeners through the details of the role of baby boomers in supporting consumer spending.

Katherine Judge: Okay, so what we found is the savings rate has fallen through generations, but has fallen particularly sharply for the baby boomer generation. So that’s people aged 60 to 78. And if you look at the 65 plus category, the savings rate is actually negative. So what’s interesting about the baby boomer generation is that it’s such a big generation, you actually can divide it into two. So you have the first cohort of baby boomers that largely retired after the financial crisis. And now you have the second cohort that just reached retirement age in 2020. And the second cohort is 40 million people. It’s significantly larger than the first generation. Over the past few years, you’ve also seen soaring net wealth per capita. So even if you adjust for inflation, real net worth per capita is up 12% since pre-pandemic and for this older cohort. So obviously that’s driving a lot of this consumption. And if you look at the makeup of balance sheets, boomers have a large share of their assets in equities. And if you look at personal income, dividend income has been the fastest growing portion of personal income over the past decade or so. So what we’re finding is that there’s just a higher marginal propensity to consume out of this financial wealth and as well out of housing wealth. Home prices have appreciated a lot since pre-pandemic and boomers that are downsizing are going to reap the benefits of those prices when they sell and that’s also going into consumption. So that’s a very big part of the consumer spending story. And then the other aspect that I mentioned is the shift to working from home and how that seems to have staying power. So, Ali, why don’t you talk more about how that’s driving consumption?

Ali Jaffery: Sure. So 2023 was an important year for work from home. You know, survey data from Nick Bloom and some of his co-authors, and they’ve done a lot of work in this area for a long time, you know, shows that US firms sorted out their hybrid work arrangements and settled in at about two days per week at home. And as a result, you know, we saw work from home steady at around 30% of work days happening from home. That stabilization is important because it’s sent a signal to households that this is your new life, this is your new daily routine, and it basically enshrined greater flexibility into many people’s lives. And we think that had an important impact on spending habits. A large chunk of the labor market is now home for an additional two days per week on average, and they have confidence that that’s what their life is going to be like going forward. That means they’re saving time on commuting, not eating at restaurants downtown all the time, wearing sweatpants more often. Looking for ways to entertain themselves and work at home more efficiently. So you see this shift from services to goods happening on a more permanent basis because of that change in lifestyle. We think some of this is showing up in the data. For example, the credit card data from Opportunity Insights shows higher spending in states that have greater work from home. And then when particularly when we look in the categories of spending, we see a huge increase on consumer spending on electronics, that’s computers, smartphones, television, software, whole range of electronic items. And if this is to help people work from home, it means that actually some of this could be paid by employers, you know, they’d be reimbursing employees for some of the spending maybe to some extent. So what we might be seeing is what is actually being recorded as consumption should actually partly be investment. So that’s an interesting angle that it could be overstating a little bit, but clearly some part of this increase is aimed at people enjoying their lives, you know, in this movement perhaps related to having greater work-life balance. You know, we see large and sustained increases in spending on toys, games, and cookware. You know, I have to say it was difficult for us to try to pin down this empirical link between, you know, work from home and consumption, but it’s hard to dismiss this as a force that’s reshaping how people consume, replace, you know, given that they’re using these things more often. And they ultimately brought a demand for durable goods.

Katherine Judge: Okay, so it does seem like there’s structurally higher demand for goods. And from the Fed’s perspective, then what does this mean? Because it seems like we’re not going to get back to the era of ultra low goods inflation that we saw post financial crisis.

Ali Jaffery: Certainly this is going to be complicated for the Fed, but in the near term, we still expect consumption growth to slow a bit, even if the long run trend or the long run level of durable goods should be higher. That’s because higher rates still impact businesses. We understand that households are more insulated given long term mortgages, but firms still are impacted and they’re going to be less willing to pass on higher wage gains, possibly less willing to hire more workers. So spending power we think will ultimately be curtailed. That will weaken demand and slow growth and that in turn is going to impact asset prices and hurt the dividend incomes of boomers. So there’ll also be some of this pull forward effect as consumers just don’t have much more room for more electronics in their house, you know, even if they have pushed the limits on that. So those two force it should result in growth slowing a bit. But in the broad scheme of things, I think it does really complicate life for the Fed. You know, having a permanently higher level of durable goods consumption or more demand in the economy for goods means that the Fed is going to need more supply of those goods to be permanently higher if we’re not going to have higher inflation. To be honest, so far we have seen a very strong supply response and we generally think that will continue through the rest of the cycle. But clearly the US economy is more vulnerable to a supply shock, particularly with low inventory levels. You know this level of goods demand could actually in the future change how inventories are managed by firms and that could offset that risk but we’ll have to see that when we get there. But I think the Fed is certainly going to have to take into account the risk that the demand supply balance in the goods market is going to be harder to achieve with these forces pushing for higher goods demand. It also weakens the transmission of monetary policy as well because, you know, durable goods demand could be less responsive to higher rates because of this preference shift or change in attitudes. But of course, you know, we could talk on and on about the Fed and I’m sure we’ll do that at a later date. But this is probably a good spot to wrap up this discussion. I wanted to thank our listeners for joining us on today’s podcast and encourage them to have a look at the note. And I hope you tune in again and join us on future episodes of Eyes on the Economy.

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