Don't Expect Consumer Spending To Be the Engine of Economic Growth It Once Was

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Letter Writer:

Gerald Turner, business owner

Date Posted:

Feb. 22, 2013


In your "Five Trends Working Against Consumer Spending" section, how could you omit the demographic of the baby boomers entering retirement and surely downsizing?

Author's Response:

You're right that I did not highlight the retirement of the baby boomers as a potential source of slower consumer spending in my article. The main reason is that I was focused on the immediate future: "At least five major trends currently evident suggest that U.S. consumer spending may grow more slowly in the near future than it has for decades."

I agree with you completely that the aging of the population is a major factor that will influence our economic growth potential in the years and decades ahead. But it is not something that will dominate the economic outlook during the next year or two or three, where I was focusing my attention. After all, the retirement of the baby boomers has been under way for a few years already and will continue for another 15 years or so.

Here is one way to estimate the time period during which baby boomers will be entering retirement in large numbers. A common definition of the baby boom generation is people born between 1946 and 1964. Most people retire in their early 60s, say, between 60 and 65. Putting those two facts together, we could say that the bulk of baby-boomer retirements will occur between 2006 and 2029.

As you rightly suggested, because the baby boomers are a large group, their retirement should amplify a long-standing tendency of retired people to spend less than their slightly younger working counterparts. There is economic research documenting that households reduce consumption spending at retirement. (If you're interested, one of the best references is Michael Hurd and Susan Rohwedder, "The Retirement-Consumption Puzzle: Anticipated and Actual Declines in Spending at Retirement," University of Michigan Working Paper 2004-069.)

Therefore, the rising number of recently retired baby boomers might be expected to reduce the growth of consumer spending for a few decades, beginning perhaps around 2006 and persisting until about 2029 or so. Obviously, these are approximations, but they give us a general idea of the time period during which the influence might be greatest.

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