The Money Has to Be Coming from Somewhere
Strong consumer spending is confounding economists. The numbers don’t seem to add up. We have negligible if any job growth. Wage growth has been on a gradual lower path for the last couple years. Inflation has remained sticky and is now accelerating. That means that real income growth (spending power after inflation) is now negative after being not all that great for a couple years now. So how is it that the money center banks that reported this week like JP Morgan, Wells Fargo and Bank of America all said basically the same thing about consumer spending and credit quality, which is that they see no slowdown and no signs of emerging credit weakness. Johnson Redbook which tracks same-store sales across a broad swath of retail says the same thing every month. The consumer is spending.
One obvious and true answer is that consumers are running down their savings. The savings rate has in fact fallen to around 4%, but that isn’t a long way off from what the savings rate has been over the past twenty years excluding the distortion of the post pandemic fiscal largesse.
Our view is that the generational wealth transfer is having a meaningful but unmeasured impact on consumer spending. We have all seen articles and listened to presentations about the tens of trillions that Baby-Boomers will bequeath Millennials and the X-Generation, but there is a dearth of research quantifying the impact that transfer is already having on spending. The Fed has a big staff, and they write about a lot of stuff, but I’ve found no work attempting to quantify the impact that generational wealth transfers are having today.
Take that housing market. Do you know anyone that has helped one or more of their kids buy their first home? I bet you do. According to Redfin, as much as 40% of first-time homebuyers used a cash gift or inheritance to make a downpayment. The housing research firm Zelman & Associates has estimated that as much as 30% of all home buyers are assisted by inheritance or a family gift. Our back of the envelope math suggests that assistance alone could add about 50 basis points to discretionary spending.
Cerulli estimates that as much as $2 Trillion a year is migrating to younger generations. Yes, the majority of that money is among the very wealthy with a far higher propensity to invest than spend, but according to a Citizen’s Bank poll, 55% of Millennials expect some generational wealth transfer over the next five years. Millennials are around forty years old so we’re talking about a lot of relatively young people who plan to receive financial assistance well before actual inheritance. So, while the bulk of the transfer is concentrated among the very wealthiest cohort, it is not a small minority of the country who will end up with spending power well above their level of income.
We’ve said many times that betting against the US consumer is like betting on the Jets to beat the Patriots. It almost never works. The point is not that the consumer won’t weaken if we start to see a recession or a rise in unemployment, but simply that the overall aggregate consumer spending data is likely to durably look better than what the income math would suggest because the wealth transfer dynamics are going to continue to grow for at least the next decade. The generational wealth transfer is happening right now, and it might just explain why the consumer can’t quit and risk assets can’t either.
