thematic investing— demographic dynamicspeople.stern.nyu.edu/...ti_demographic_dynamics.pdf ·...

Thematic Investing—Demographic Dynamics

C15.0042Lesson 2

Edward M. Kerschner

E. Kerschner

Drivers of the Economy

GDP =

Consumer+

Government+

Industry

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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

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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

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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

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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

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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

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CONSUMERCOMEBACK

The Case for the Consumer as presented in 1995

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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

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(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

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The Pain the consumer felt in ‘95-’96 . . .

Consumer Comeback

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Consumer Comeback. . . begins to reverse in ’97

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-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

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($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


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

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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


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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


0

20

40

60

80

100%

40%

% of Americans saying time more valuable than money

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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


Multitasking has become the norm

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The Time Drought

“Great Rooms”


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The Time Drought

TheInternet


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“Stressless Leisure”

What Americans want in a vacation?

• “Comfortable” 94%• “Relaxing” 92%• “Somewhat adventurous” 79%• “Physically challenging” 35%• “Slightly dangerous” 20%



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

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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.



• Efficient, automated services (i.e. Internet) are winners• Premium-quality, full-service providers are winners• “Mediocre middle” is vulnerable

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The New Drug Culture

Boomers are using drugs to “fix things” when - or even before -something goes wrong.


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

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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 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

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The American Age of AffluenceWho Are We?

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Net worth per household has surged


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


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

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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”

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Percentage of men in labor force age 55-64

6065707580859095%

1960 1970 1980 1990 2000 2010

Labor participation rate ages 55-64 rising

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HouseCarClothing

The Gray Wave: The Way We Were

Quality vs. QuantityIntangibles vs. TangiblesTime vs. Money

The Gray Wave: The Way We Are Now

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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

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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.

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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


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.

thematic investing— demographic dynamicspeople.stern.nyu.edu/...ti_demographic_dynamics.pdf ·...

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