Americans are experiencing a sustained boost in the economy, largely due to older individuals who are benefiting from gains in the stock and housing markets. These older Americans are contributing significantly to consumer spending, driving economic growth. Many are splurging on high-priced services like travel, health care, and entertainment, increasing pressure on prices and inflation. Affluent older Americans are also benefiting from the Federal Reserve’s rate hikes, especially if they own government bonds.
The “wealth effect” is a key factor in the unexpected strength of the economy, as rising home and stock values give people confidence to increase their spending. This has forced a shift in the Fed’s plans, as officials were anticipating cutting rates but are now hesitating due to the resiliency of the economy. Household wealth has experienced significant growth in recent years, with stock prices and home values soaring. While wealth gains are not universal, older Americans hold a disproportionate amount of household wealth.
Despite the overall growth in wealth, many older Americans face financial challenges, with a significant portion having no retirement savings. The aging baby boomer generation, however, has accumulated assets over the years and accounts for a rising share of consumer spending. The Fed’s rate hikes have created a divide in the economy by age, with older, wealthier Americans less affected. Younger individuals are struggling with expensive home prices and high mortgage rates.
Economists suggest that the wealth effect on spending may be larger now due to retirement-age Americans spending more from wealth. Americans ages 65 and over make up a larger portion of the population, and those with stock holdings are more aware of increases in their net worth. Stock market wealth typically boosts spending on discretionary items like restaurants, travel, and entertainment. This surge in spending in sectors of the economy is contributing to elevated inflation.
The travel industry is experiencing a boom, with many Americans planning overseas vacations. Cruise providers, like Royal Caribbean, are reporting strong demand and increased pricing for their products. The positive customer sentiment is fueled by strong labor markets, wage growth, stabilizing inflation, and record-high household net worth. Inflation remains sticky, driven by solid consumer spending, particularly on services. Prices for services have climbed significantly from the previous year, exceeding the Fed’s 2% inflation target.
