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Tuesday, July 28, 2009 2:16 AM


Incredible Shrinking Boomer Economy


BusinessWeek has an interesting cover story this week about The Leaner Baby Boomer Economy.

Calling Mercedes the "the quintessential boomer brand", BusinessWeek estimates that Mercedes will sell a third fewer cars in America. The article also notes efforts by companies like Nordstrom (JWN), Starwood Hotels & Resorts (HOT), Outback Steakhouse, BMW and Target (TGT) to offer value shopping or "cheap chic" in an effort to reach out to generations X and Y.

By now most are familiar with this new wave of frugality. Thus the real story is not article itself but the is the easy to miss sidebar statistics as follows:

  • $400 Billion: Amount that will come out of annual U.S. consumption as thrifty boomers push savings rate from 1% to nearly 5%.

  • 47%: Boomers share of national disposable income in 2005 before the bubble burst. Boomers contributed only 7% to national savings.

  • 2.4%: Forecasted GDP growth over the next three decades as boomers ratchet back. GDP has grown 3.2% a year since 1965.

  • 69%: Portion of boomers aged 54 to 63 who are financially unprepared for retirement.

  • 78%: Boomers' share of GDP growth during the bubble years of 1995 to 2005

Those stats are from a McKinsey study, and there is nothing remotely inflationary about any of them.

In his Town Hall Meetings Bernanke said:

"It takes GDP growth of about 2.5 percent to keep the jobless rate constant. But the Fed expects growth of only about 1 percent in the last six months of the year. So that's not enough to bring down the unemployment rate."

Inquiring minds might be asking: Why does it take 2.5% growth to keep the jobless rate constant? The answer is the first 2.5%+- of GDP is based on hedonics and imputations. In plain English, the first 2.5%+- of GDP (if not much more) is fictional. When the economy is growing at 2% it feels like a recession because it probably is, even though no one will admit it.

Now consider the implications of a 2.4% GDP forecast for three decades.

If Bernanke is correct that it takes 2.5% GDP growth just to keep the unemployment rate constant, and McKinsey is also correct in its 2.4% forecast, we will be stuck with 10% unemployment for decades.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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