How a “youth boom” could shake up spending trends

Insights from Morgan Stanley Research

08/19/21

Summary: As Millennials and Gen Z overtake Baby Boomers as the dominant US consumers, which retail categories might benefit from the generational passing of the prime spending baton?

With Generation Y—a.k.a. the Millennials—overtaking Baby Boomers as the most populous generation in the US—and Gen Z close behind—the country could see the dawn of an economic “youth boom,” with significant implications for retailers, the food and beverage industries, electronics, and travel—and opportunities for investors.

This hand-off between outsized US generations occurs as Millennials move through their prime spending years and the oldest Gen Z enter prime spending. Meanwhile, the Boomers, who currently spend more than the population average, could reduce their discretionary spending, as they retire and navigate soaring healthcare costs.

The Morgan Stanley Research consumer retail team painted a nuanced portrait of US consumer spending, with some subsectors poised to benefit from accelerating Gen Y and Z spending—while some Boomer-driven subsectors could face headwinds.

A spending tag team

The analysis builds on a report from the firm’s economic research team, along with an in-depth survey of Gen Y and Z consumers. The report found that the workforce overlap of the two outsized generations—73 million for Millennials and 78 million for Gen Z—could power not only higher consumption, but also higher wages and housing demand, all pillars of GDP growth—even amid the ongoing pandemic.

“After reaching a low point of 1.7% in 2018, total consumption growth—the largest component of GDP—is projected to climb steadily to average 2.5% in the 2030s, driven by Millennials, then Gen Z, moving through their prime working years,” said equity analyst Lauren Schenk, lead author of the team’s report.

These same demographic factors drove strong consumption growth in 1990s, in the case of the Boomers; now, the two overlapping generations may create a similar, more pronounced, dynamic.

Shifting priorities

While the report doesn’t assume changing consumer spending patterns, it does identify secular themes, combined with demographic data, that point to areas where spending could surge.

“America's youth uses technology for price discovery, shrewdly seeking value in whichever channel—store or online—offers the best deal,” said Schenk. “However, they still seek out brands. Gen Z's consumption patterns are also not materially different from Gen Y, compared with the average consumer.”

According to Schenk, both generations spend a disproportionate share of their budget on mobile phones, dining out, housing, and vehicles.

Chart - America's youth spends a disproportionate share of wallet on vehicles, apparel, food-away-from-home, and housing.

Source: 2017 Haver Analytics, Morgan Stanley Research forecasts


Alterations for apparel

One key area of change could be in apparel. While the sector could face tough headwinds in the coming years—driven largely by the reduced spending from consumers 65 and older—some subsectors may buck the trend by appealing to younger demographics.

Morgan Stanley projects active wear will gain 2.5 percentage points of share from general apparel over the next five years—led by athletic footwear—thanks to strong brands, a push toward direct-to-consumer business models and innovation-led pricing power.

At the same time, retail and apparel companies with a focus on value are also well-positioned, based on data from Morgan Stanley's AlphaWise survey. The data show that trends are less important to Gen Z, but value remains a key determinant of purchasing behavior. Just 21% of Gen Z consumers view fashion trends as very or somewhat important, vs. 34% of Gen Y. According to AlphaWise, about 50% of Gen Z respondents are likely to choose the lowest-price product over the branded one—consistent with Gen Y.1

Fluctuating tastes

In the food category, the aging Boomer cohort could benefit grocers and companies that operate in the food-at-home space—think packaged food manufacturers and supermarkets—while the growth of Gens Y and Z may benefit companies that focus on the food-away-from-home space like restaurants and fast-food.

Morgan Stanley analysts believe the trend favoring food-away-from-home has room to continue, mainly driven by rapidly expanding access to restaurant food via new channels, including delivery, take-out, mobile ordering, and online marketplaces. They found that younger demographics have shown a particular interest in these new channels and are most likely to use them. These channels also blur the line between food-away-from-home and food-at-home, enabling more restaurant food to be consumed at home.

Other categories to watch

For investors, some other areas should see a boost from changing demographics. The home improvement category appears particularly strong, driven by those 65 and older, who are more likely to engage in repair/remodel activities for personal satisfaction rather than in an attempt to raise the value of a home.

In the lodging and travel sector, companies with scale and loyalty programs, as well as those companies tied to experiential travel, appear best positioned to outperform.

Investors may also look to mutual funds or exchange-traded funds (ETFs) focused on companies that are impacted by Millennial and Gen Z spending trends and activities.

 

The source of this article, How a “Youth Boom” Could Shake Up Spending Trends, was originally published on August 16, 2019.

  1. Online survey among ~5,900 consumers ages 16-34 in the US during September 2018. The Gen Z sample (n=2,919) is defined as consumers ages 16-21 representing 7.8% of total population; Gen Y (n=2,970) are 22-34 year olds representing 15.2% of population. The sample for each generation is nationally representative in terms of gender, age, and region. The maximum margin of error based on the total sample for each generation at a 95% confidence interval is +/- 1.81% and higher between subgroups.

How can E*TRADE help?

Thematic Investing

Find ETFs that align with your values or with social, economic, and technology trends.

All-Star funds

Choose from a list of leading exchange-traded funds or mutual funds selected by E*TRADE's investment strategy team.

Brokerage account

Investing and trading account

Buy and sell stocks, ETFs, mutual funds, options, bonds, and more.

What to read next...

As Gen Z joins Gen Y in the workforce, the two cohorts could deliver a sizable jolt to US GDP, consumption, wages, and housing—presenting a bullish outlook for investors.

Findings from a recent Morgan Stanley survey reveal significant growth prospects for the online dating industry.

Looking to expand your financial knowledge?