Millennials are killing countless industries- but the Fed says it’s mostly just because they’re poor

Happy Monday All! This week’s edition of Money in the Media Monday we’re looking at a Business Insider article called “Millennials are killing countless industries- but the Fed says it’s mostly just because they’re poor.” To millennials I’m sure this is no surprise. With rising costs and stagnant wages, something’s got to give. This article references a study performed by Federal Reserve Board. This study compares consumption behavior of varying generations to determine how, millennials’ spending may differ. These types of studies have been performed in the past, notable between the baby boomer generation for their frivolous spending and the Silent Generation, known for their savings tendencies. This discussion will cover both the Federal Reserve study and the Business Insider take on this study.

Generation Definitions

Before we dive into this topic, I want to level set the timelines for the following generations as the start and end dates have been hotly debated. Here is how the Pew Research Center defines these generations that are used in this study:

  • Millennials: Born between 1981-1997
  • Generation X: Born between 1965-1980
  • Baby Boomers: Born between 1946-1964
  • The Silent Generation: Born between 1929-1945
  • The Greatest Generation: Born between 1915-1928

Now that we’re all on the same page, let’s get into this week’s article!

Financial Comparison

Status

The study broke down each generations financial well being status into 3 categories: income, debts and assets/net worth.

Overall, the study showed that the income of the millennial generation to be 11% and 14% lower than Gen X and baby boomer generations, respectively. This is unsurprising as this is just one of the many sources discussing income stagnation.

In terms of debt, there is only comparative data for Gen X and millennial generations and their total amounts of debt are similar at age 37. However, the content of their debts reveal the differences. Millennials have less credit card debt, similar car loans and ~8% less millennials have mortgages as of age 37. The main contributor to millennial debt is, of course, student loans, with more than 1 in every 3 millennials carrying student loan debt. This is against the 1 in every 5 for Gen X.

Moving to assets the study identifies the following:

The median total assets held by millennials in 2016 is significantly lower than baby boomers in 1989 and only half as big as Generation X members in 2001.

Kurz, Christopher, Geng Li, and Daniel J. Vine (2018). “Are Millennials Different?,” Finance and Economics Discussion Series 2018-080. Washington: Board of Governors of the Federal Reserve System, https://doi.org/10.17016/FEDS.2018.080.

Rolling all of these factors into net worth, the ability to accumulate less assets, while having higher debts creates a decreased overall net worth, which is determined by the following equation.

Assets- Liabilities (debts) = Net Worth

Consumption

The study only evaluates the costs of the key three categories in any household budget: housing, food and transportation.

Food and housing were analyzed in the same case study with food spending found to be similar to prior generations. Housing found that millennials tend to spend more than previous generations, this could be related to the rise in housing costs, but it does prove that the younger generation does not consume less, in terms of housing than older generations as was the assumption.

For transportation, millennials were found to spend just about the same as the Silent and Great generations. Meanwhile, baby boomers and Gen X generations both spend more on transportation. There was a dip for several years after the Great Recession in the new car buying industry numbers, particularly for millennials, but they have since jumped right back to align with the two older living generations’ spending.

Interesting to note is that that the overall spending of millennials actually aligns more with the generations that lived through the Great Depression.

Why the Disparity?

There are several reasons that millennials are objectively worse off than the generations before. The overarching themes are shown in the following flow chart:

The study makes this observation on the subject:

For example, Malmendier and Nagel (2011, 2016) show that the economic conditions that an individual has experienced in the past can have long-lived, if not permanent, effects on his investment decisions and inflation expectations. This result may be particularly salient for millennials, who came of prime age during the Great Recession, when new entrants to the labor market faced historically weak labor demand and unusually tight credit conditions. The effects of these unfavorable conditions on labor force attachment and attitudes toward saving and spending may have been more permanent for millennials than for members of generations that were more established in their careers and lives at that time.

Kurz, Christopher, Geng Li, and Daniel J. Vine (2018). “Are Millennials Different?,” Finance and Economics Discussion Series 2018-080. Washington: Board of Governors of the Federal Reserve System, https://doi.org/10.17016/FEDS.2018.080.

The gist being that millennials found themselves in a far more vulnerable position than their predecessors when the US was hit with the Great Recession. Many, myself included, of these millennials were either just starting or soon-to-be starting their job searches post college at that time. For many, the low demand for jobs was an indicator to stay in school to earn a higher degree and increase their marketability. This decision usually was accompanied by increasing debts.

Then, even upon graduation, the wages they were offered had not kept up with inflation over the years and would limit their spending and saving abilities. An additional, little discussed, factor is that as defined-benefit retirement pensions faded from benefits packages, most millennials would not be grandfathered into these programs. This makes them more responsible than prior generations for funding their retirements entirely on their own. This further limits cashflow and therefore, options, for millenials.

Now, of course there are exceptions to these circumstances, but overall the trends moved in this direction. The mindset created by witnessing the struggles of the preceding generations coupled with the additional struggles of having the markets fall out when trying to get initial footing has left many millennials scrambling to build financial stability.

Killers Of Industry- Really?

The buzz all over the internet shows that millennials are killing industries left and right. However, the Federal Reserve study shows that this is not due to some generational change in consumerism. It is the result of having less cashflow, in turn, causing the younger generation to become highly selective in their purchases.

So, while the Business Insider article states that millennials are killing these industries because they’re poor, I argue that this shows a much more important point. The decrease in available cash for millennials has caused a resurgence of frugality and values based spending. This is what will allow the younger generation to build financial security moving forward.

Are you a millennial or no? Have you been adversely affected by the impact of the Great Recession? How did it affect how you approach your finances? Let me know in the comments below!

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