Older Americans, like 64-year-old Joan Harris, who have seen gains in stock and housing markets, are fueling a boost to the U.S. economy. These retirees are spending more on higher-priced services like travel, health care, and entertainment, putting pressure on prices and inflation. Affluent older Americans, benefitting from the Fed’s rate hikes through higher bond yields, are further contributing to economic growth. The “wealth effect” from rising home and stock values has led to increased consumer spending, shifting the Fed’s plans from projected rate cuts to maintaining the current high benchmark rate.
The Fed’s rate hikes have affected borrowing costs, but have not dampened the spending of older, wealthier Americans who own homes and have already paid off their debts. However, younger Americans are facing challenges with expensive home prices and high mortgage rates, making it harder for them to buy a first home. This divide in economic impact by age is reflected in the experiences of individuals like Joan Harris’s daughter, Ruby, who struggles to afford a house in a desirable neighborhood despite a well-paying job.
Older Americans are accounting for a larger share of consumer spending, with those aged 65 and older supplying nearly 22% of spending in 2022. Despite this, a significant portion of Americans over 50 have no retirement savings, highlighting the financial challenges faced by some older individuals. The economy has seen a significant increase in household wealth in recent years, driven by gains in various asset classes. Wealth is disproportionately held by older Americans, who now own nearly three-quarters of all household wealth, up from 68% in 2010.
The continued strength of the economy defying expectations of a sharp slowdown is due in part to the increased spending of older Americans. Economists suggest that the wealth effect may have a larger impact on spending now, as retirement-age Americans are more likely to spend out of their wealth and constitute a larger proportion of the population. Higher spending on discretionary items such as restaurants, travel, and entertainment is boosting sectors experiencing surging spending and inflation. Despite the Fed’s efforts to slow growth and tame inflation, the economy remains resilient due to robust consumer spending, particularly on services.
The recent blowout earnings reported by cruise providers like Royal Caribbean and strong demand for travel indicate a positive outlook for the economy. Customer sentiment is buoyed by factors such as resilient labor markets, wage growth, stabilizing inflation, and record-high household net worth. Despite concerns about inflation remaining sticky, solid consumer spending on services continues to drive economic growth. The shifting dynamics of consumer spending and wealth distribution among older and younger Americans have significant implications for the overall health of the economy and the effectiveness of monetary policy.
