The greatest generation of consumers is sitting on its credit cards. That's bad news for the U.S. economy, even after it pulls out of the recession
In September I got the first of many phone calls asking what automobile someone should purchase next—with a qualifier. These suddenly single-minded callers signaled the most shocking shift in the mindset of boomer consumers since the Second Energy Crisis and recession of 1979-83. Moreover, these discussions prove that, should the public react to bad economic news by clamping down on spending, we can take a nasty recession and turn it into something far worse.
Welcome to 2009.
Rusty Wood and wife Carol were the quintessential boomers living the good life. In 1987 they traded a two-week-old BMW in for a new Acura Legend, just because they disliked the Beemer's ride. Rusty would go on to start Bizmart, the forerunner of today's office supply supercenters, selling it within a few years. In an early semi-retirement he took flying lessons and enjoyed his leisure time. Carol moved into sport utilities in the 1990s, while Rusty leased from Lexus. Only now, Rusty was saying he thought he might choose something more downscale next. After all, he said simply, at his age he no longer needed to impress anyone. What he was really saying was that he is now willing to pay much less for his mobility.
That refrain continued in virtually every call I got. Either the potential new car buyers were going down-market or, fearing the economic unknown, were postponing any purchase…to some date far in the future.
From King to Court Jester
Much is made today of how Detroit's automakers managed to lose their customer base, but the seeds of their destruction were planted decades ago: Detroit's loss of market share is generational in character.
From 1946 to 1964, around 4 million new Americans were born every year. When they became adults from 1967 through 1985, the American automobile market would never be the same. In 1967 there were approximately 97 million vehicles on American highways; that number had jumped to 171.6 million as the last of the boomers turned 21. No previous generation of Americans had ever made or spent more money, and boomers enjoyed their consumer lifestyle even if it meant taking on serious debt. That truth, however, doesn't convey Detroit's loss of respect.
When the first two-thirds of the boomers came of age, Detroit was still king and gasoline was cheap; the last third entered adulthood after two major energy crises and the rise of Japanese automakers. In their youth the larger group of boomers had lusted after Camaros, Mustangs, Monte Carlos, and Cutlasses. Exciting cars didn't exist as the youngest boomers turned 21 in 1985; and though the following year set a record for car sales, it also marked the start of the decline of Oldsmobile.
In contrast, our grandparents simply wanted to be mobile, and Ford (F) made cars affordable for all. As the middle class grew, our parents knew General Motors (GM) offered a car for every purse and purpose. Important here is that both of those generations also knew Ford had pioneered the modern airline business, while GM once owned Eastern Airlines. To them Detroit was creating modern America.
They were aware that GM's engineers had perfected refrigerators and made them widely affordable, and that Detroit's Arsenal of Democracy helped win World War II. They knew Detroit had nourished a blue-collar middle class, beginning with Ford's watershed $5 workday. Only decades later, Detroit had accepted union contracts; and anyone who had lived through the Great Depression considered dependable, higher wages proof that America was on the right track.
For those two generations, Detroit was the symbol of everything that was right in America. For the early baby boomers, Detroit made the wheels they most wanted. It carried forward as the first boomers fed the minivan craze, following that with a mania for SUVs, and Detroit profited. But as our grandparents and then our parents retired and passed on, that unconditional love, or "Detroit or nothing" started crumbling.
Our parents and grandparents believed in and were loyal to what Detroit stood for: American business and manufacturing dominance, national pride, and superiority. Early boomers focused only on Detroit's products; we were the ones who could become fickle.
Detroit's Biggest Miscalculation: Saturn
Undone by the First and Second Energy Crises, Detroit sincerely believed that to regain the love and trust of the motoring public they would have to build a better Honda Civic. Saturn would be its call to arms. But there was a problem: While it was true that incomes for most American families stayed remarkably static from 1973 through 2000, it was also true that the boomer generation was expanding the size of the upper middle class just as the blue-collar middle class was beginning to wither.
Detroit was trying to beat Japan at the low end just as the high-end demand took off. GM brought Saturn to market just as Acura, Infiniti, and Lexus made their debuts. Detroit had rolled the dice at the wrong end of the table.
When the boomers did return to Detroit for their SUVs, GM's managers should have realized that Saturn represented the polar opposite of what the public really wanted. They didn't.
Epiphany: September 2008
After the stock market crash of 2000 the economy expanded, based on little more than an unsustainable asset bubble, with the predictable result that the bubble burst. And the financial markets went into meltdown, just as the first of the 79 million baby boomers started drawing Social Security.
Twice in less than nine years a whole generation's retirement plans had been substantially devastated. Moreover, as the two-thirds of the boomers who still viewed Detroit with at least a little respect saw it, retirement was starting to look less certain and they were running out of time to fund it.
For boomers who had experienced financial crises in their lifetimes before, seemingly decades remained in which to recover and make retirement comfortable. Now, as $40 trillion in net worth was wiped out worldwide, suddenly 65 looks like it's coming the day after tomorrow.
This time around, America can't count on the younger generations to help out. CNW Marketing Research pointed out this month that fully 53% of buyers under age 30 have disappeared from the new car market in just the last two years. The negative impact is such that, based on last year's 13.2 million car sales, it would take 19.2 years to replace the entire American fleet. For comparison, the year the first boomers became adults America enjoyed a 9.8-year fleet replacement rate, based on new car sales.
And for perspective, at the depth of the Great Depression in 1933, car sales ran at a 14.8-year replacement rate.
The Perfect Storm: Four Crises About to Collide
So the boomers have quit spending, fearing the short distance to retirement, while more than half of the youngest generation has disappeared from the car market because of a lack of economic opportunity. That's why the economy has fallen so far, so fast.
If this economic downturn lasts into 2010, by the time there is a real recovery boomers will be even closer to retirement and their retirement accounts only a little fatter. That is not a recipe for the consumer rebound America badly needs.
One bright spot is that this downturn has most likely postponed peak oil production, but it will still happen within the next 10 years. Predictions on what that means for world economies range all over the map. But it would be reasonable to assume that oil will be over $200 a barrel, while gasoline could cost $7 or more per gallon. And next time those figures won't fall back down again. Ever.
We are also in a period of widespread deleveraging: Vastly overrated asset prices must be brought back to reality and the foolish loans that created that asset bubble must be written off. And it's not just mortgages and housing values behind this problem. In the last decade equity and leveraged buyouts of businesses and industry were also overvalued and overleveraged. It appears the government's response is to find ways to backstop the asset value slide, in the vain hope that it will help the finance industry self-correct once the economy recovers and other asset values improve.
That should work, based on the history of America's economy over the past 70 years, but it probably won't work today. The boomers are going to act more like their grandparents, now shunning most credit and making fewer major purchases other than necessities. Boomers will become better buyers than they are today, but it is doubtful they will ever return to their three-decade-long consumer orgy. America's two-tiered wage system, which started with the airlines in 1980 and today has moved to the auto industry, will continue to keep many younger workers earning less than the boomers were paid for the same jobs 30 years ago.
America is not at the bottom of another economic crisis; we are at the crossroads of the future.
We can't stop the boomers' new vision of austerity, nor can we stop the coming energy crisis. Backstopping de-leveraging today will only create new financial pressures that will once again burst when the new metric price for energy collides with younger generations' lower incomes.
Message to Washington: We're out of time.