The alphabet soup of interpretations for today’s economy has lately landed on the letter “K” to describe the diverging ways inflation has impacted Americans: boom times for the asset-wealthy at the top, and a much more painful moment for those struggling to stay afloat amid rising prices for groceries and electricity.
The logic of the K-shaped economy has been used to explain why consumption has yet to dip towards recession levels. While low-income shoppers are cutting back on spending, high earners keep infusing the economy with their cash, fueled by stock and real estate gains. One estimate by Moody’s Analytics calculated last year that the top 10% of earners made up nearly half of all consumer spending.
Economists as well as Fed Chair Jerome Powell have said that model will be unsustainable in the long run, risking widening wealth inequality or a broader economic downturn if the wealthy are unable to maintain their spending habits.
But what if they can? Analysts have warned that a stock market slump could force high rollers to tighten their belts too, but some economists say there is reason to believe lavish spending will persevere. Many of the economy’s highest spenders fall relatively neatly into demographic age groups with predictable consumption habits. For them, there could yet be good times ahead.
Instead of K-shaped, a more useful way to break down the current economy would be by age groups, according to Ed Yardeni, president of Yardeni Research, who in a blog post last week described how he might interpret today’s divergence in spending.
“We believe that a better way to understand consumer resilience is to focus on what we call the ‘gen-shaped’ economy,” the market veteran wrote.
The highest spenders today are the 76 million baby boomers who made out the best from appreciating asset prices over the past few years. Meanwhile, Gen Zers and millennials are relatively new to the labor force. A high youth unemployment rate, tight labor market for junior roles, and mounting student loan and credit card debt mean many younger Americans are struggling financially, Yardeni explained, and likely account for much of the spending slowdown at the bottom end of the K.
Baby boomers might be leaving their healthy paychecks behind as they retire in greater numbers, but they depart the workforce as the wealthiest generation in history, with a net worth of around $85.4 trillion, he added. While younger Americans struggle to buy their first home or break into the stock market, boomers retain their tight grip on assets. Because of their deep pockets in savings, Yardeni expects boomers to keep up their spending well into retirement.
Gen Z and millennials will have to wait until later in their career to dream of having similar net worths. In the meantime, Yardeni wrote, many are likely to continue receiving financial support from their well-off parents.
Younger Americans do eventually stand to inherit much of the wealth baby boomers have accumulated. The so-called “Great Wealth Transfer” could be worth as much as $124 trillion, with nearly $300 billion inherited last year alone. But this mass inheritance will take time to play out in its entirety, with some analysts estimating Gen Z and millennials will continue receiving these funds until 2048.
To be sure, the wealth transfer will be contested between widows and charities as well as children, and not all younger Americans are likely to receive enough financial support from their parents to compete in today’s economy with many struggling to afford a home.
But for now, there are few signs of sunsetting for baby boomers’ amassed wealth. In 2023, more than half of corporate equities and mutual fund shares were in the generation’s hands.
“Baby boomers can’t possibly spend all this, so some of this is going to flow down,” Yardeni said in a video last week discussing the gen-shaped economy.
