The millennial consumer and the future of U.S. growth

Millennials are growing up and settling down, which means they’re headed toward a leadership role in providing support for U.S. growth. But beyond being the next generation to shoulder the burden of demand creation for credit, housing, and consumer goods, millennials are deeply involved in reshaping the industries with which they’re closely identified—particularly tech, ecommerce, and social media. This may give them a uniquely powerful form of economic influence in the years ahead.

Millennials are expecting

Born between 1981 and 1996, millennials recently surpassed the baby boomers as the largest living generational cohort in the United States.¹ But a question some market observers worry over is whether millennials, who are notoriously burdened with significant student loan debt², are prepared to carry the productivity torch and drive sustainable growth. In line with these concerns, data from the Pew Research Center for social and demographic trends suggests that millennials aren’t as interested as older generations when it comes to getting married, starting families, or moving out of their parents’ homes.³

That said, recent consumer data suggests that some millennials are acting more and more like prior generations For example, Google’s search volume records show a declining interest in wedding registries and a spiking interest in baby registries—potentially an early harbinger of millennials becoming new parents and forming new households.

Millennials’ latest wish list? Baby gear

Bar chart showing the popularity of Google searches for “wedding registry” and “baby registry” from 2004 to September 2019. Whereas the former has modestly declined in popularity since 2014, the latter has risen sharply since 2017. Source: Google, Zelman & Associates, September 2019. LTM means last 12 months.

Another important signal emerges from more comprehensive loan data. Viewed holistically with other types of loans, many millennials are entering the zone where the trajectories of their debt are crossing, with student loans on a steep decline and mortgage debt on an equally steep incline. Millennials in their late 20s and early 30s may not only be expecting, they’re also buying homes and retiring their student loans at a healthy rate.

Millennials are on a path to building equity

Line graph showing average debt by household—broken out by student debt, auto debt, credit card debt, housing debt, and an “other” category—according to age. For millennials, who range between age 24 and 38 today, student debt begins to decline around age 27 while mortgage debt begins to rise steeply around the same age. Source: Federal Reserve, Morgan Stanley Research. Data as of the 2016 Survey of Consumer Finances. Copyright 2019 Morgan Stanley.

When it comes to credit demand, millennials are just getting started

Indeed, millennials are only just beginning to hit their borrowing stride. Whereas Generation X, the slackers of the 90s, gave lackluster support to loan growth in the wake of the global financial crisis of 2008, millennials are already adding more than every other living generation combined to the growth of net new consumer loans.

Millennials will drive loan growth for the foreseeable future

A combined bar and line graph showing net loan growth by generation starting in 1992 and estimated until 2025. As of 2019, millennials’ loan growth is greater than that of the other various generations combined. The line in the chart shows an aggregate percentage of loan growth over the same period, and ranges from a high of around 10% in 2004 and dips to a low just below zero between 2010 and 2013. Today’s percentage loan growth is at approximately 4% and is estimated to remain flat through 2025. Source: Federal Reserve, Morgan Stanley Research, as of April 11, 2019. Copyright 2019 Morgan Stanley.

All of these elements—from babies to big loans and first-time home purchases—are good for the U.S. economy. Most obviously, they’re good for U.S. banks, whose balance sheets are, in our estimation, rock solid and able to support home and durable goods purchases, as well as business lending. After a decade of fortifying their business models, banks have invested in technology that millennials demand and stand ready to support a lengthy loan demand cycle. The maturation of millennials also good for the housing sector, where purchases by Millennials could build momentum in new housing starts, thereby providing a potential boost to construction, durable goods producers, home improvement retailers, and the myriad businesses in the economy that supply and service them.

Notably, as well, the types of debt referenced here are equity-producing forms of debt. Mortgages fuel long-term wealth creation in real assets while enabling higher rates of discretionary spending, which is foundational to U.S. GDP growth. Student loans fund higher education, which leads to higher-paying jobs and rising wages, which is reflected in recent payroll data.⁴ In any case, these types of loans aren’t stifling consumers’ ability to spend: Today’s low interest rates mean household debt measured by debt service ratios is lower than in past cycles.⁵ Assuming interest rates stay in the “lower for longer” range we’ve experienced for the last decade, it won’t be surprising to see millennials driving new consumer loan demand for the next decade and longer.⁶

Millennials and values-based consumption

This would all be a conventional story of generational change were it not for certain transformational effects that millennials are having in the communication services, information technology, and consumer discretionary sectors. Beyond adding to demand growth here, they’re also influencing the sustainability of these sectors from within.

Millennials are thinking of their roles as consumers and employees in terms of values, particularly collective values that place an emphasis on sustainability. Data from a few years ago shows the steady upswing, for example, of consumer demand for sustainable products and services. This maturing generation is pushing companies, including their employers, to think hard about the environmental and social responsibility—or lack thereof—inherent in their business models. 

Consumers are willing to pay more for sustainable products and services

Chart showing a rising percentage of survey respondents who reported they would pay more for sustainable products and services, between 2013 and 2015. The chart also includes a callout that states: “Of millennial respondents, nearly 75% in 2015 reported they’d pay more for sustainable products and services.” Source: “The sustainability imperative: new insights on consumer expectations,” Nielsen, October 2015.

Consider the cohort of young Amazon employees who encouraged America’s biggest online retailer to commit to a lower-carbon future. In the wake of their activism, Amazon announced plans to go carbon-neutral by 2040.⁷ Or consider efforts by Apple employees, who’ve found an activist CEO in Tim Cook, to build fair labor practices into their company’s global supply chains and take a progressive stand on U.S. immigration issues. Other examples include Alphabet’s and Wayfair’s millennials, who are part of a labor movement that’s raising a loud call for ethical guidelines governing the sale of their companies’ products and services.⁸ Millennial employees are demanding, previous generations were more passive, that their employers take a more sustainable approach to growth. They’re demonstrating, as consumers, that values-based consumerism is a vital aspect of maintaining a competitive advantage.

Millennials are the first generation whose formative experiences as consumers have been heavily mediated by ecommerce and social media. But they’re also the first generation to rapidly set new norms in these areas that have sometimes left entire industries struggling to catch up. In this way, the millennial consumer has an amplified growth impact, particularly when it comes to teaching their employers, the providers of their favorite brands, and basically any company with a digital presence that financial value only exists in a network of other values. That’s good news for more than just company shareholders and short-term profits; it’s a benefit for all contemporary and future stakeholders in the U.S. economy’s growth potential.

1 “The U.S. Has an Edge on GDP Growth, and It's Thanks to Millennials,” Forbes, May 16, 2019. 2 “A Look At Millennial Student Debt,” Forbes, October 3, 2019. 3 Pew Research Center, December 31, 2018. See 4 Bureau of Labor Statistics, September 18, 2019. 5 Fundstrat, Bloomberg, FactSet, as of June 30, 2019. 6 “In the Coming Youth Boom, Millennials Fuel Loan Growth; Gen Z Up for Grabs?” Morgan Stanley, April 11, 2019. 7 “Amazon’s climate pledge confirms the new power of employees,” Quartz at Work, September 20, 2019. 8 “Activist employees pose new labour relations threat to bosses,” The Financial Times, July 3, 2019.

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Sandy Sanders, CFA

Sandy Sanders, CFA, 

Senior Managing Director and Senior Portfolio Manager

Manulife Investment Management

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