Will US Consumption Enjoy a Demographic Boost?

While the long term aging of the US population remains the key demographic trend, there are two more positive near-term ones for investors to focus on. Firstly, a near 6m rebound in the population of 25-44 year old ‘prime’ consumers has begun and secondly pent-up demand for about 2.5m new household formations from the historically high proportion of under 30s currently living with family, both because the graduate job market has been weak and the surge in student debt to over $1trn as tuition fees have soared. Throughout the 1990s and until 2003, there were more than two Americans in the 25-54 age cohort for every one aged over 55; that ratio has steadily fallen over the past decade to less than 1.5 currently, a change that has profoundly impacted consumer spending patterns. For instance, one of the most intriguing trend reversals of recent years is that Americans have been driving less – driving mileage per capita has fallen each year since 2005. The evidence from analysis by the Department of Transportation shows clearly that older drivers drive less on average, and their rising share in the overall population has been the key factor in this trend, which has slowed gasoline and auto demand growth.

The most active group of drivers are those aged 35 to 54, driving an average of just over 15k miles per year, while those aged 65 and older drive an average of less than 8k miles per year. The number of prime-driving age Americans plunged by 2.8m from 2005-13 as baby boomers aged i.e. it peaked with miles driven per capita. Overall, Americans drove almost a billion fewer miles over the last nine years than they would have if average driving trends hadn’t changed. If a car has an average lifespan of 100,000 miles that implies underlying demand for vehicles over the period was about a million cars per year lower, which would have put recent sales back in line with pre-crisis trends of 16-17m units a year.

For the first time since 2000, the population of Americans in the peak consuming age group is increasing again having been falling steadily for the past decade. There were 3.8m fewer Americans aged 30 to 44 in 2012 than there were in 2002, but Census Bureau projections show that by 2023 there will be almost 6m more prime spending age Americans, suggesting that underlying demand patterns for housing and consumer durables such as autos will have a structural tailwind. The aging fleet of vehicles (currently at over 11 years average age) is a key support for sales. The mechanical reliability of modern vehicles has certainly been a factor in that longevity as well as stagnant discretionary real incomes and tighter credit access, but those extra prime-age car buyers will be the key dynamic sustaining a strong sales pace.

Over five years during and after the recession, the number of households established in America plummeted by about 800,000 a year from the previous seven years as the ‘graduate barista in the basement’ became a social cliché. The proportion of 25-34 year olds living with their parents spiked in the crisis aftermath, by 3 percentage points to over 14%, but as employment conditions improve and housing affordability remains historically high, they are now belatedly leaving home, primarily into rental apartments. Whether they buy or rent, someone has to supply the extra housing unit and apartment vacancies have been trending down steadily to a decade low of 4.1% in Q4 13.

From 1997 to 2007, about 1.5m households were formed on average each year but in the three years post-recession, the rate collapsed to half a million per year and only 380,000 new households were created over the four quarters through September 2013, an unsustainably low rate that is building substantial pent-up demand if the employment market for graduates continues to steadily recover. There are up to 2.5m young Americans living with parents who would on pre-crisis trends by now have moved out and the average formation rate since 2008 is the lowest level since records started being kept in the late 1940s. About 45% of 18- to 30-year-olds are currently living with older family members, at least five percentage points higher than long-term trend. Along with natural population growth, a gradually healthier employment situation should push the formation rate up to potentially about 1.4-1.5m annually over the next several years, requiring an acceleration in housing starts to at least that level, with positive multiplier effects through the wider economy via durables consumption.