The assortment of alphabet-based explanations for today’s economy has recently fixated on the letter “” to illustrate how inflation has affected Americans differently: good times for the asset-wealthy at the top, and a far more difficult period for those trying to survive as grocery and electricity prices go up.
The reasoning behind the K-shaped economy has been used to explain why consumer spending hasn’t dropped to recession levels. While low-income buyers are , higher earners continue to pump money into the economy, driven by gains in stocks and real estate. A Moody’s Analytics estimate last year found that the top 10% of earners accounted for of total consumer spending.
Economists and Federal Reserve Chair Jerome Powell have stated that this model will be over the long term, with risks of increasing wealth inequality or a more widespread economic slump if the wealthy can’t keep up their spending patterns.
But what if they can? Analysts have cautioned that a stock market decline could make big spenders cut back too, but some economists argue there’s reason to think extravagant spending will continue. Many of the economy’s biggest spenders fit fairly clearly into demographic age groups with predictable spending habits. For these groups, better times might still be ahead.
Rather than K-shaped, a more helpful way to analyze the current economy is by age groups, per Ed Yardeni, president of Yardeni Research, who in a last week explained how he would interpret today’s spending gaps.
“We think a better way to grasp consumer resilience is to look at what we term the ‘gen-shaped’ economy,” the seasoned market expert wrote.
Today’s biggest spenders are the 76 million baby boomers who benefited the most from rising asset prices over the past several years. At the same time, Gen Z and millennials are relatively new to the workforce. A high youth unemployment rate, a competitive labor market for entry-level jobs, and growing student loan and credit card debt mean many younger Americans are facing financial hardship, Yardeni explained, and likely contribute to much of the spending slowdown at the lower end of the K.
Baby boomers may be leaving their solid salaries as they retire in larger numbers, but they leave the workforce as the , with a net worth of about $85.4 trillion, he added. While younger Americans fight to buy their first home or get into the stock market, boomers hold onto their firm control of assets. Due to their substantial savings, Yardeni predicts boomers will continue spending well into retirement.
Gen Z and millennials will have to wait until later in their careers to even imagine having similar net worths. In the interim, Yardeni noted, many will probably keep getting financial help from their wealthy parents.
Younger Americans will eventually inherit a large portion of the wealth baby boomers have built up. The so-called “Great Wealth Transfer” could be valued at up to , with nearly $300 billion inherited just last year. But this massive transfer will take time to fully unfold, with some analysts suggesting Gen Z and millennials will keep getting these funds until 2048.
It’s important to note that the wealth transfer will be split between widows, charities, and children, and not all younger Americans will get enough financial help from their parents to compete in today’s economy—many are struggling to afford a home.
But for now, there’s little indication that baby boomers’ accumulated wealth is declining. In 2023, of corporate stocks and mutual fund shares were owned by the generation.
“Baby boomers can’t possibly spend all of this, so some of it will trickle down,” Yardeni stated in a last week when talking about the gen-shaped economy.