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Thematic Investing—Demographic Dynamics
C15.0042Lesson 2
Edward M. Kerschner
E. Kerschner
Drivers of the Economy
GDP =
Consumer+
Government+
Industry
E. Kerschner
Rotating Drivers of the Economy
1940-52: WWII government military spending propels economy out of depression.1952-60: Corporations restructure from war-time footing, prosper while Eisenhower reins in government and consumer is hurt by frequent recessions.1960-67: Strong consumer spending propels rapid growth.1967-82: Government expands—Vietnam War and Great Society; rising taxes, accelerating inflation, weak productivitygrowth hurt corporations and consumers.1982-87: Consumer boosted by tax cuts, lower inflation. Corporations hurt by disinflation, strong dollar, foreign competition; Reagan shrinks government.1987-95: Corporations restructure aggressively, slowing employment growth, suppressing wage gains, trimming benefits. Government’s influence slips further.
Consumer MythsThe Wealth Effect, Interest Rates
& Other Misconceptions
E. Kerschner
Consumer MythsConsumer spending & income
Year-over-year percent change
-4%-2%0%2%4%6%8%
10%
1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000
Consumer spending
DisposableIncome
Year-over-year percent change
-40%
-20%0%
20%40%60%
Consumer spending
S&P 500
-4%-2%0%2%4%6%8%10%
1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000
Consumer spending & stock prices
E. Kerschner
Consumer Myths
Correlation Coefficients with Real Consumer Spending
Real Disposable Income 0.76Employment 0.61Stocks (S&P 500) 0.293-month T-bill 0.1310 year T-bond -0.12
Consumer spending is driven by Income
E. Kerschner
Consumer MythsThe 1980sIn ’80s stocks rose; consumer spending didn't
100
200
300
400
1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990
S&P 500
Consumer spending
Index 12/79 = 100
Index 12/79 = 100
5
7
9
11
13
15%
Consumer Spending, right scale
10-year bond, left scale
3-mo. T-bill left scale
100
200
300
400
1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990
In ’80s falling rates didn’t drive spending
E. Kerschner
Consumer MythsThe 1990s
Index 12/89 = 100
In ’90s consumer spending rose with income
100
110
120
130
140
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000
Consumer Spending
Disposable income
E. Kerschner
CONSUMERCOMEBACK
The Case for the Consumer as presented in 1995
E. Kerschner
U.S. Labor Force Growth by Decade
1.09%
1.70%
2.67%
1.60%1.06%
0%
1%
2%
3%
1950s 1960s 1970s 1980s 1990s
As Labor Growth Slows …
Consumer Comeback
Wages — Real Average Hourly Earnings
$6.50$7.00$7.50$8.00$8.50$9.00
1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000
. . . Incomes will Rise
E. Kerschner
(A) Year over year change (B) 4 Year Compound Annual Nominal Rate Through 1997
And Strong Productivity Forecast Proved True
4.6%
4.3%
5.2%
0% 1% 2% 3% 4% 5% 6%
NonfarmProductivity (A)
S&P Sales per Employee (B)
Q4 ‘98
Q4 ‘98
Manufacturing SectorProductivity (A)
Consumer Comeback
E. Kerschner
The Pain the consumer felt in ‘95-’96 . . .
Consumer Comeback
E. Kerschner
Consumer Comeback. . . begins to reverse in ’97
E. Kerschner
-20%
-10%
0%
10%
20%
30%
40%
50%
60%
5-9
10-14
15-19
20-24
25-29
30-34
35-39
40-44
45-49
50-54
55-59
60-64
65-69
70-74
75-79
80+Under5
Generation Y Aging Boomers Senior SeniorsPercent Change by Age in U.S. Population 1995-2005
Consumer Comeback“Aging Boomers” will drive consumer behavior
E. Kerschner
($1,000) $0 $1,000 $2,000 $3,000 $4,000
EDUCATION 154.3%ALIMONY, CHILD SUPPORT 81.6%
ENTERTAINMENT 18.9%OTHER VEHICLE EXPENSES 15.4%
PENSIONS AND SOCIAL SECURITY 8.0%LIFE & OTHER PERS. INSURANCE 66.4%
VEHICLE PURCHASES 9.0%FOOD AWAY FROM HOME 12.3%
HOUSEHOLD FURN. & EQUIPT. 15.4%UTIL., FUELS, AND PUB. SERV. 9.7%
HEALTHCARE 8.6%APPAREL & SERVICES 6.2%
PUBLIC TRANSPORTATION 36.0%GASOLINE AND MOTOR OIL 8.3%HOUSEKEEPING SUPPLIES 17.2%PERS. CARE PROD. & SERV. 5.1%
READING 11.0%TOBACCO PROD. & SMOKING 6.5%
MISCELLANEOUS -0.6%ALCOHOLIC BEVERAGES -9.6%
FOOD AT HOME -3.7%SHELTER -3.7%
HOUSEHOLD OPERATIONS -39.2%
ANNUAL EXPENDITURES 9.6% $3,591
($5)$21$21$23$79$100$120$129$144
$229$234$249$257$286$297$350$396
$662$676
($31)($124)
($258)($263)
Change in household expenditures from 35-44 to 45-54 age group
Consumer Comeback“Aging Boomers” will drive consumer behavior
The New Millennium
AmericanThe Case for the Consumer
as presented in 1998E. Kerschner
E. Kerschner
The New Millennium American
To understand the future behavior of American Consumers, the Gallup Organization, a leading expert on consumer behavior, conducted proprietary surveys of 1,000 Americans. There were four surveys between September 1998 and April 2001.
In combination with analysis of Government data on historical consumer behavior and its relationship to macroeconomic conditions, as well as other attitudinal surveys, a picture of the likely outlook for the “New Millennium American” began to emerge.
E. Kerschner
Cradle-to-grave entrepreneurialismUnion membership declines
05101520253035%
1960 1965 1970 1975 1980 1985 1990 1995 2000
The New Millennium American
Over a quarter of baby boomers (28%) and more than one in six of the pre-retirement age group (17%) have worked for no more than two years in their current job.
PW/Gallup, July 1998
10%
15%
20%
25%
30%
1960 1965 1970 1975 1980 1985 1990 1995 2000
Gov’t as % of GDP declines
68
70
72
74
76
78
1960 1965 1970 1975 1980 1985 1990 1995 2000
Life Expectancy increases
E. Kerschner
Cradle-to-grave entrepreneurialism
Former occupation at reduced hours and pay 15%
Part-time new job 28%
Start business10%
Full-time different job2%
Consult20%
Won't work25%
Boomers plan on working after retiring
The New Millennium American
E. Kerschner
The Time Drought
Average workweek has stopped declining
34
35
36
37
38
39
60 64 68 72 76 80 84 88 92 96 00
In hours, annually
The New Millennium American
0
20
40
60
80
100%
40%
% of Americans saying time more valuable than money
E. Kerschner
The Time Drought
As a child Today1950sListen to radio at home
Listen to radioRide in car and...
Listen to radio and...Ride in car and...
Talk on phone
The New Millennium American
Multitasking has become the norm
E. Kerschner
The Time Drought
“Great Rooms”
The New Millennium American
E. Kerschner
The Time Drought
TheInternet
The New Millennium American
E. Kerschner
“Stressless Leisure”
What Americans want in a vacation?
• “Comfortable” 94%• “Relaxing” 92%• “Somewhat adventurous” 79%• “Physically challenging” 35%• “Slightly dangerous” 20%
PW/Gallup, July 1998
The New Millennium American
71%
61%
50%
55%
60%
65%
70%
75%
80%
1993 1997
Fewer Prefer a sense of participating
20%22%24%26%28%30%32%34%
30%
27%
1993 1997
Exercise/sports less of a way to relax
E. Kerschner
The no-service / full-service economy
Just under half of Americans (45%) say they choose the stores they shop at because the service they provide helps them to better manage their time.
PW/Gallup, July 1998
The New Millennium American
• Efficient, automated services (i.e. Internet) are winners• Premium-quality, full-service providers are winners• “Mediocre middle” is vulnerable
E. Kerschner
The New Drug Culture
Boomers are using drugs to “fix things” when - or even before -something goes wrong.
The New Millennium American
Prescriptions written per person
8
9
10
11
12
13
85 90 95 00
• Propecia for hair-loss• Dexetrim for weight-loss• Zyban for smoking-cessation• Viagra for sexual problems• Prozac for depression• Xanax for anxiety
The American Age of Affluence
The Case for the Consumer as presented in 2000/2001
E. Kerschner
E. Kerschner
The American Age of Affluence
-20%-10%
0%10%20%30%40%50%60%
5-9
10-14
15-19
20-24
25-29
30-34
35-39
40-44
45-49
50-54
55-59
60-64
65-69
70-74
75-79
80+Under5
Generation Y Aging Boomers Senior Seniors
Percent Change by Age in U.S. Population 1995-2005
-20%-10%
0%10%20%30%40%50%60%
5-9
10-14
15-19
20-24
25-29
30-34
35-39
40-44
45-49
50-54
55-59
60-64
65-69
70-74
75-79
80+Under5
Generation Y Aging Boomers Senior SeniorsPercent Change by Age in U.S. Population 2000-2010
Affluent and Aging
E. Kerschner
The American Age of AffluenceWho Are We?
E. Kerschner
Net worth per household has surged
The American Age of Affluence
Household assets less household liabilities ($000s)
0100200300400
$500
1960 1970 1980 1990 2000 2010
$20$25$30$35$40$45$50$55
1960 1970 1980 1990 2000 2010
FlatFlat
In thousands $$60
Real Disposable Income has surged
E. Kerschner
Home and car ownership rates are rising rapidly
The American Age of Affluence
Owned as % of total households; autos per driver
62
63
64
65
66
67
68%
0.5
0.6
0.7
0.8
0.9
1.0
1.1
1960 1970 1980 1990 2000 2010
Home
Car
Sum of unemployment rate and inflation rate
0%
5%
10%
15%
20%
25%
1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000
Misery Index near lows
E. Kerschner
The American Age of Affluence
What baby boomers plan to do after retirement
Why baby boomers plan to work after retirement
0
10
20
30
40%
Enjoyment Money Challenge
34%30% 28%
Same occupation at reduced hours, pay
Start business
Part-timedifferent job
Same occupationsame hours, pay
11%
21%13%
12%
Won't work37%
Full-time
2%different job
Boomers will still work after “retiring”
E. Kerschner
The American Age of Affluence
Percentage of men in labor force age 55-64
6065707580859095%
1960 1970 1980 1990 2000 2010
Labor participation rate ages 55-64 rising
E. Kerschner
The American Age of Affluence
HouseCarClothing
The Gray Wave: The Way We Were
Quality vs. QuantityIntangibles vs. TangiblesTime vs. Money
The Gray Wave: The Way We Are Now
E. Kerschner
The American Age of Affluence
Quantity of goods Americans plan to buy
*given improved economic conditions
Versus the last 12 months
20% 20%
0
10
20
30
40%
July 2000
MoreLess
Feb 2001*
37%
10%
23%
4%
0
10
20
30
40%
July 2000
HigherLower
Feb 2001*
27%
2%
Versus the last 12 months
Quality of goods Americans plan to buy
Quality vs Quantity
E. Kerschner
Intangibles vs. TangiblesThe American Age of Affluence
Over half (55%) of Americans have employed someone in the past year to provide personal services.
—PaineWebber/Gallup, July 2000.
E. Kerschner
Time vs. MoneyThe American Age of Affluence
In the past several years almost half of Americans (45%) have reduced the amount of time they spend watching TV. Two in five Americans have cut back on the amount of time they spend on outdoor activities or exercising.
—PaineWebber/Gallup, July 2000.
0
20
40
60
80
100%
45%40%
1996 2000
Percent of Americans saying
lack of time is a bigger problem than
lack of money
E. Kerschner
The American Age of Affluence
0%
30%
60%
90%
Buy New Home Buy New Car Spend More on Clothes
19%
34% 33%
80%
65% 67%YesNo
What will you do?
“When things get better…”
0%
10%
20%
30%
40%
50%
Dept. Store DiscounterSuperstoreHomeProducts
Clothes
27%
12%
23%
15%
34%
8%
39%
11%
21%21%
MoreLess
I will spend more/less on...
MoreLess
0%
10%
20%
30%
40%
50%
Vacations Restaurants Movies
46%
23%16%
12% 14%19%
I will spend more/less on...
0%
5%
10%
15%
20%
25%
PC DVD TV
21%
15% 14%10%
15% 16%
MoreLess
E. Kerschner
A Grayer and Gloomier Consumer
The Case for the Consumer as presented in 2003
E. Kerschner
Grayer & Gloomier
The fastest growing segment of G7 population is 60-64. The "gray wave," having seen misery index peak at 21.9 in 1980 (when they were in their 20s and early 30s) are confronting a protracted increase in "misery" for essentially first time in their adult lives.
G7 Demographics% change by age population 2000–10
Source: US Census Bureau
35%
-15%
-5%
5%
15%
25%
0- 4 5- 9 10-14 15-19 20-24 25-29 30-34 35-39 40-44 45-49 50-54 55-59 60-64 65-69 70-74 75-79 80+
Grayer
E. Kerschner
Grayer & Gloomier
The "misery index"— unemployment + inflation — is at highest level in four years and is 220 basis points above its 1999 trough of 6.0%.
Misery IndexSum of Unemployment Rate and Inflation Rate
Source: DRI, UBS LLC
05
10152025
1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005US G7
Gloomier
E. Kerschner
Number of Americans aged 35-44 (income 124% of the average household) declines 1% annually over next decade. Aged 45-54 (top-earnings group at 129% of avg.) still growing; but growth has slowed from 4% in mid 1990s to 2% currently. We are three years past the "crossover point" when the top-earning 45-54 bracket started to grow more slowly than the 55-64 group, whose income is 109% of the average.
-2.0%-1.0%0.0%1.0%2.0%3.0%4.0%5.0%
Under 25 25-34 35-44 45-54 55-64 65-74 75+
2002-07E 2002-12ECAGRs
Growth in Age CohortsOver the Next Five and 10 Years
$0$10,000$20,000$30,000$40,000$50,000$60,000
under 25 25-34 35-44 45-54 55-64 65-74 75 andover
All Households
Household Income Level, 2001 GrowthBy Head-of-Household Age Cohort
Source: US Census Bureau Source: Bureau of Labor Statistics, Consumer Expenditure Survey
Grayer & GloomierGrayer
E. Kerschner
Housing benefits: Immigrants’ homeownership rate is initially low compared to native-borns’. However, it increases sharply over time.
0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%
200019901980
200019901980
Immigrants that arrived 1975-79, and were 25-34 in 1980
Natives who were 25-34 in 1980
Home Ownership RatesAmong Immigrants and Native-born Americans
Source: George J. Borjas, Homeownership in the Immigrant Population, Mortgage Bankers Association of America
Grayer & GloomierA "Nation of Immigrants" Keeps Growing
E. Kerschner
Slower population growth negative for consumer non-durables (demand is driven by population rather than income). ”Food away from home" and apparel to decline significantly. But as incomes rise, consumers trade up to: better houses, furniture, appliances, vehicles and other durable goods.
How Much More or Less Households Aged 55-64 Spend Versus Households Aged 45-54
-21.1%
-15.6%
-13.5%
-32.6%
-35% -30% -25% -20% -15% -10% -5% 0%
Apparel
Food Away from home
Food
Total
Source: Bureau of Labor Statistics, Consumer Expenditure Survey
Non-Durables Poorly PositionedGrayer & Gloomier
E. Kerschner
Food and beverage firms are poorly positioned as population growth slows in developed countries, boomers fight obesity, and processed foods lose share to fresh food. Cosmetic and personal care benefit.
-2%-1%0%1%2%3%4%5%
Cosmetics Householdproducts
Beverages Food Tobacco
4-5%
2-3% 2%
-1 to -2%
2%
By Category, 2002-05EUnit Growth Rates of Consumer Nondurables
Grooming Over ConsumingGrayer & Gloomier
E. Kerschner
Increasingly unequal income distribution is positive for companies catering to the affluent and those serving low-income families. Firms in the "mediocre middle" are likely to get squeezed.
1980-2001, Pre-tax Income, 2001 DollarsChange in Aggregate Income Claimed by Income Groups
Source: US Census Bureau
-4% -2% 0% 2% 4% 6% 8%
Lowest 20% (under $24,000)
Second 20% ($24,000-41,127)
Middle 20% ($41,127-62,500)
Fourth 20% ($62,500-94,150)
Top 20% ($over 94,150)
Top 5% (over $164,104)
Extreme Consumption as Inequality IncreasesGrayer & Gloomier
E. Kerschner
Grayer & Gloomier
Baby boomers have to save for retirement. Savings tends to rise when consumer confidence is low. And the rising number of high-income households is also positive for saving.
Consumer Confidence Index Versus Savings RateQ3 1977-Q4 2002
0%
2%
4%
6%
8%
10%
12%
14%
40 60 80 100 120 140 160
Savings Rate
Consumer Confidence Index
r2 = 39%
The case for savings
2000 US Savings Rate
-1%0%1%2%3%4%5%6%
NIPA NIPA adj forCap Gains
Fed ReserveFlow ofFunds
BLSConsumer
ExpenditureSurvey
Savings may not be as low as conventional thought.
E. Kerschner
Grayer & Gloomier
Healthcare’s share of GDP continues to grow because it is a logical place for consumers to spend incremental income, it offers good value as technology improves, older consumers need more healthcare, and many US consumers are fascinated by health and fitness.
0%2%4%6%8%
10%12%14%16%18%20%
1960 1970 1980 1990 2000 2010E
Estimates
As a Percentage of GDPNational Healthcare Expenditure
Source: Centers for Medicare & Medicaid Services
Health Conscious
$0
$500
$1,000
$1,500
$2,000
$2,500
$3,000
$3,500
$4,000
under 25 25-34 35-44 45-54 55-64 65 and over
Total Insurance Medical services Drugs Medical supplies
Out-of-Pocket Expenditures for Healthcare, by Category
E. Kerschner
Rotating Drivers of the Economy1940-52: WWII government military spending propels economy out of depression.1952-60: Corporations restructure from war-time footing, prosper while Eisenhower reins in government and consumer is hurt by frequent recessions.1960-67: Strong consumer spending propels rapid growth.1967-82: Government expands—Vietnam War and Great Society; rising taxes, accelerating inflation, weak productivitygrowth hurt corporations and consumers.1982-87: Consumer boosted by tax cuts, lower inflation. Corporations hurt by disinflation, strong dollar, foreign competition; Reagan shrinks government.1987-95: Corporations restructure aggressively, slowing employment growth, suppressing wage gains, trimming benefits. Government’s influence slips further.1995-01: Consumers benefit from rising real wages, strong dollar, strong stock market. Consumption share of GDP rises.2002-??: Government and/or Industry drive growth.
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