As retailers woo shoppers this holiday season, they may not get far with the millennial generation (born between the early 1980s and the early 2000s). Trapped in a weak job market, working for low wages and mired in student loan debts, millennials have less to spend than other demographic groups, despite some recent gains, according to Mark Zandi, chief economist of Moody’s Analytics, a subsidiary of the rating agency Moody’s. Across the board, however, he saw a strengthening job market, increasing wages and a brightening economic outlook.
“Millennials … started off in the labor force at a particularly bad time [with a] severe recession and a very weak recovery,” said Zandi. Many who couldn’t get jobs after graduating pursued further education, but accumulated more student loans in the process, he added. Zandi spoke on the savings outlook for millennials and compared that with trends for baby boomers (born between 1946 and 1964) on the Knowledge at Wharton show on Wharton Business Radio on SiriusXM channel 111. (Listen to the podcast at the top of this page.)
A Negative Savings Rate
“ over the last five or six years has been getting a job,” said Zandi. They have also been earning comparatively lower salaries than the generation before them, he added. He noted that millennials are now getting larger pay increases than they were previously, but there is “still a long way to go for them.”
Millennials also nurse student loan debts, which makes them “the only age group that has a negative savings rate,” said Zandi. However, it is not atypical for people in their 20s and early 30s to save little or even dissave, he added. The baby boomer generation, too, had a negative savings rate at the same point in its lifecycle, he noted.
“The No. 1 problem for [millennials] over the last five or six years has been getting a job.”
With low savings, millennials put off buying their first homes. “Most people buy their first home somewhere between [the ages of] 35 and 40,” said Zandi. “Millennials aren’t quite there yet, but the leading edge of the millennials — those in their early and mid-30s — just aren’t as well prepared financially. They are going to wait until they are older and they have more time to save for their down payment and get their credit score in order.”
The overhang of student loans makes it tougher for millennials. Zandi noted that with changes in mortgage lending rules earlier this year, lenders now look more closely at debt-to-income ratios of prospective borrowers before sanctioning loans. “If you have student loans, [lenders] are finding that you are blowing through that debt-to-income criteria and are unable to qualify for a mortgage,” he said.
Millennials who couldn’t find jobs and stayed on in college for a higher degree “did the exact right thing,” said Zandi. “Despite the higher tuitions, it is still a slam-dunk investment for everyone — if you graduate,” he said. “If you don’t graduate, you don’t get those returns [and] the higher wages, but you have the debt. That’s a really tough place to be — and unfortunately, a growing proportion of our millennials are stuck in that situation.”
These days, millennials are seeing the strongest wage growth across all age groups, but that is not about to change their fortunes dramatically. “They’ve started in a deep hole, and so even with these strong wage gains and employment gains, it will take them a while to get out of that hole,” Zandi said. “But at least we stopped the decline.”
The Price of Low Wages
Millennials may also pay a heavy price for entering the work force with low wages. “One disconcerting historical fact is that the wage you receive at your first job goes a long way toward determining what your total earnings will be over your lifetime,” said Zandi. “Even with the catch-up, the millennial group may not earn as much as other demographic groups, just because it started at a very, very difficult time.”
If younger people are finding it difficult to land jobs, part of the problem is that many baby boomers are staying on longer in their jobs. “That cuts into upward mobility and hurts wage growth,” said Zandi. He noted that the baby boomers are the only age group (55 and older) that has been increasing its labor participation rate — the proportion of the population that is in the work force. “The boomers are scrambling to get it together as they approach retirement,” he added.
In fact, the baby-boomer generation has been on a savings spree in recent years. “The boomers were big dissavers,” said Zandi, who happens to be a baby boomer. “We were freewheeling, spending a lot.” However, the savings rate for baby boomers jumped during the recent recession and has stayed at high levels, he noted. “Maybe we’ve been scared straight — and appropriately so — because we are approaching retirement and we needed to save.”
“Despite higher tuitions, [higher education] is still slam-dunk investment for everyone — if you graduate.”
Encouraging Signs Ahead
At a broader level, Zandi found encouraging signs ahead. He noted that existing home sales rose in October and are at their highest annual pace since September 2013, according to the National Association of Realtors. He attributed that to record-low interest rates and a strengthening job market. “Everything is coming together, and hopefully we will we see housing kick into a higher gear because that is a key to the broader economy,” he said.
Zandi expected the economy to add another 225,000 jobs in November, which would be in line with recent trends in government data. “If we maintain the current pace of job growth and assuming stable labor force participation, we will be back to full employment no later than two years down the road,” he said. He also predicted that wage growth will emerge from dormancy to accelerate by next spring and summer. “It will help the housing market, help consumer spending, help the economy and make sure we do get back to full employment,” he added.
Zandi saw that bright outlook extend to this year’s Christmas holiday shopping season. “All the elements for better buying are coming together — we’ve got more jobs; the stock market is at a record high; in aggregate, debt service burdens of households are as low as they’ve been in the data we have back in 1980; gasoline prices are down quite a bit, and consumer confidence as a result of all that is better.”