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How The Millennial Generation Could Affect The Economy Over The Next Five Years

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This year, millennials are expected to surpass Boomers as the largest living American generation, and soon, their effects on the economy will be felt in even greater measure, according a new Standard & Poor’s report released Wednesday.

The report by Beth Ann Bovino, Standard & Poor’s U.S. chief economist, noted that this generation, born from 1981 to 1997, numbers 80 million and that they spend an annual $600 billion. By 2020, they could account for $1.4 trillion in spending, or 30% of total retail sales.

Surprisingly though, this generation has conservative spending habits similar to those of the Silent Generation, which grew up during and after the Great Depression. What distinguishes Millennials from other generations is the historic student loan debt that the generation carries, which in turn has meant that Millennials (and some of Gen X) have had less access to full-time jobs and wealth than previous cohorts.

Bovino looked at what this generation might do over the next five years to see how they might affect the U.S. economy. If the economy continues to strengthen, as Standard & Poor’s projects, there’s potential that Millennials could start making big-ticket purchases that contribute to economic growth. On the other hand, their student loan debt could keep them from spending and not buying houses, costing the economy.

“Millennials are going to be making up half the workforce in just five years. They’re already the largest cohort of American workers,” said Bovino, to explain the importance of this generation. That’s why some of their characteristics — marrying and having children late, renting instead of buying a home, preferring to live in cities and not own cars — could disrupt the U.S. economy. “Two thirds of GDP is consumption, so we rely on people spending money,” says Bovino.

Comparison To The Silent Generation

Millennials exhibit some characteristics similar to those of the Silent Generation, who were born from the mid-1920s through the early 1940s, grew up during and after the Great Depression, but were too young to fight at the start of World War II. Both generations experienced major financial crises during their formative years.

Millennials now are quite fiscally conservative, holding more than half their assets in cash, less than a third in equities, and 15% in fixed-income assets.

The two generations differ in that upon finishing its education, the Silent Generation were able to enter a strong economy bolstered by New Deal programs. “By contrast, government spending on infrastructure projects as a percentage of U.S. GDP is now at a two-decade low, which Standard & Poor's projects could significantly impact long-term competitiveness,” Bovino writes.

Historic Student Loan Debt

The biggest difference between the two generations is Millennials’ record student loan debt, which could depress their spending ability. Adjusting for inflation, current borrowers have to pay back about twice as much as borrowers from 20 years ago. In 1989, the bottom three-fifths of Americans aged 18-34 had an average net worth of $3,300. In 2013, that same group had a net debt of $7,700.

The debt burden can sometimes force members of this generation into taking jobs they don’t want, as they settle for jobs that they wouldn’t have considered in a better market. It takes at least 15 years for workers who start their careers in a recession to make up for the decrease in earnings that they experience at the start compared to people who enter the job market at a time of economic prosperity.

On the other hand, Millennials are the most educated generation, so Bovino believes that their career success has been delayed, not canceled. Wages are projected to pick up to 3% this year, which means pay for young workers will increase. Since workers with a college degree generally earn double what those with a high school degree make, Millennials may soon have more earning power.

The one nagging question is about the quality of the education Millennials have received. “A recent report by the Educational Testing Service (ETS) indicates that the country's largest generation is at risk of losing its edge against international peers. The report found that despite having the highest levels of education of any generation in U.S. history, these young adults on average demonstrate comparatively weak skills in literacy, numeracy, and problem solving in technology-rich environments against their international peers,” writes Bovino.

Downside Scenario: The Key In Housing

If wages don’t pick up through the next decade, Bovino says Millennials would be forced to continue to avoid big purchases like homes and cars and delay starting families. Housing starts would also grow slowly. Altogether, Bovino estimates that a downside scenario could mean the U.S. would miss out on $49 billion a year through 2019.

Millennials are already forming households at a slower rate than previous generations. The number of 25- to 34-year-olds living in their parents homes jumped 17.5% from 2007 to 2010, whereas in 1960, three-quarters of women and two-thirds of men were financially independent, had married and had children by age 30. Even in 2003, a 30-year-old American was twice as likely to own his or her own home than to live with his or her parents.

Traditionally, homeownership rates have been higher for people with a history of student loan debt than those without. But for the first time in at least 10 years, 30-year-olds with no history of student loans are more likely to have a mortgage than those with that kind of history.

Another problem is that student loan defaults are worsening. Although Standard & Poor’s doesn’t expect widespread defaults, a significant number of defaults would hurt the country’s finances since the federal government backs more than 85% of student loans.

‘Escape Velocity’

Despite these challenges, recent signals — job creation and hourly wages are up, with wage increases outpacing inflation. 

There’s some momentum in the jobs market and workers have more bargaining power. That’s a strength for millennials as they continue to participate in the market,” says Bovino.

And Millennials are starting to buy more new cars, having now surpassed Gen-Xers as the second-largest group of buyers. “We’re seeing Gen Yers start to buy more cars, which is a big-ticket item, and that means they’re feeling a bit more optimistic,” she says.

Bovino expects the economy to continue developing in a way that will allow this generation “to transition into the traditional definition of full adulthood--and, in a virtuous circle, begin to buy the houses, cars, and other big-ticket items that will further stimulate economic growth,” she writes. 

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