Are Millennials Ready To Save the Economy?

Save might be too strong a word right now, but their financial prospects have improved decidedly, in part because they are proving to be frugal, good savers - and they are not yet burdened with mortgage debt. JL

Brian Chappatta and Elaine He report in Bloomberg:

Sometime in 2019, millennials will overtake baby boomers to become the largest adult cohort in America. Once Gen Z follows millennials into adulthood, the potential for growth is even greater, because the younger generation will start “on a firmer financial footing.”  Millennials’ median income is improving. They’re trying to save for retirement. They mostly don’t have mortgage debt, which is more than education and auto obligations, but they are weighed down more than their predecessors. Debt and a slow start toward wealth accumulation could hold this generation back. (But) they could provide the growth engine for America in the coming decade.

By now, the word “millennials” transcends a simple shorthand for the group of people born between 1981 and 1996. For some, it might evoke splurging on avocado toast. For others, it’s the generation that shunned marriage and homeownership; a narcissistic, lazy cohort that grew up in a world of participation trophies.

Cutting through the noise and understanding what’s true and what’s exaggerated about this generation is a pressing matter for those on Wall Street. A group of Morgan Stanley strategists, for instance, wrote a 57-page report titled “The Coming Youth Boom” that makes a long-term bullish case for the U.S. economy — and the stock market — because of demographic trends. Sometime in 2019 (if not already), millennials will overtake baby boomers to become the largest adult cohort in America. Once Gen Z follows millennials into adulthood, Morgan Stanley argues, the potential for growth is even greater, in part because the younger generation will start “on a firmer financial footing.”

Are millennials really ready to be in the driver’s seat of the U.S. economy and financial markets? How do their investment habits in early adulthood compare with those of previous generations? And how much of a setback was the Great Recession, combined with the explosive growth in college costs over the past decades?

The Federal Reserve’s Survey of Consumer Finances has some answers. Last released in 2016, it includes an age group of “less than 35” that aligns with the first of the millennial generation. The Fed announced in February that it began an update. Using primarily the central bank’s data (adjusted for inflation), with other more recent sources as available, the millennial balance sheet starts to take shape.

Income for the youngest Americans has risen steadily since the Great Recession roiled the job market. The unemployment rate among 25- to 34-year-olds surpassed 10% in May 2010. By 2016 that was cut in half to about 5%. It’s now less than 4%.

Millennials aren’t just spending it all on avocado toast. Maybe it’s the lasting scars from the past recession, but more young people are socking away money compared with all other age groups.

Millennials, however, are off to a slow start in building up their wealth, with a median net worth of $11,000 in 2016. Younger cohorts in 1989 achieved higher wealth at $14,600, and young people in 1995 had the highest net worth at $18,800.

Millennials are somewhat wary of the stock market. In the post-crisis years, younger-than-35 families haven’t invested in stocks like their predecessors. Just 10% held equities in 2016, better than the all-time low of 7.2% in 2013, but still a smaller share than even 2010, as the recession ended. The mean value of their stock holdings was $42,400 in 2016. This figure tends to fluctuate widely, reaching $87,700 in 2001 and then dropping to $17,400 in 2004. Though millennials are getting a head start on retirement, not surprisingly, they haven’t come close to accumulating the amount of assets as their older cohorts. Additionally, a 2019 study from Fidelity Investments found that millennial participation in defined-contribution retirement plans increased by 82% in the past 10 years. It also found that 69% of millennials are entirely invested in a target date fund, likely because they defaulted into the option through their employers. For younger cohorts, those funds are disproportionately invested in stocks.Near-zero interest rates have made savings bonds and certificates of deposit relics of the past. Americans younger than 35 have never owned fewer savings bonds or CDs, on a percentage basis. By comparison, a larger share of older generations invest in these ultra-safe investments.

Homeownership divides the haves and the have-nots among millennials. Yet for those who do have a home as an asset, the average value of $195,400 is higher than any period except 2004 and 2007, in the lead-up to the housing crisis. That disparity suggests a higher barrier to entry to homeownership.

Business ownership is down across the board. Even among those who owned businesses, the average value was $123,100, within spitting distance of 1995’s $119,200, the all-time low.

Yes, student loans are holding millennials back. You’ve heard about the student-loan crisis from Democratic presidential candidates Bernie Sanders and Elizabeth Warren. It’s very real for younger Americans who have the highest figures on record (percentage-wise and amount outstanding) for the younger-than-35 group going back to 1989.Most millennials don’t own homes and, therefore, most don’t have mortgage debt. Student loans probably also crowded out their ability to take on housing debt. Among those who did have mortgage debt in 2016, it totaled an average of $142,200, the lowest since 2001. Experian credit data from the first quarter of 2019 tells a story of haves and have-nots. Just 22% of millennials have mortgage debt, still a low figure. But among those who have it, the average amount owed was $222,211 — up 5% from the first quarter of 2018. That was a much bigger jump than any older cohort.

Millennials will go further into debt to get a car than young people used to in previous decades. They appear to be borrowing to afford today’s high-tech automobiles. The average auto loan debt of $16,300 in 2016 for younger-than-35 families is the highest on record. The percentage of Americans younger than 35 who carried credit card balances tumbled in the wake of the recession, but has picked up ever since. But the post-crisis hangover isn’t entirely over with the percentage indebted still higher during the 1990s and early 2000s. The average amount of credit card debt is low both relative to other age groups and previous young generations. However, a report this year from the New York Fed suggests these ramped up purchases might be catching up to younger people. About 8% of outstanding credit card debt among Americans between the ages of 18 and 29 was delinquent by at least 90 days, the highest level since early 2011.

Millennials’ median income is improving, but still not great. They’re trying to do the right thing and save for retirement. They mostly don’t have mortgage debt, which is more substantial than education and auto obligations, but are nonetheless weighed down more than their predecessors.

It all adds up to a tricky balancing act. If not managed properly, debt and a slow start toward wealth accumulation could hold this generation back for years to come. If unshackled, though, they could very well provide the growth engine for America in the coming decade.