The Generation Propping Up the U.S. Economy: Gen Z and Millennials

As the U.S. Bureau of Labor Statistics (BLS) prepares to release its Annual Consumer Expenditure Survey, much of the data is expected to confirm what many households are already experiencing: the majority of U.S. households have lower after-tax incomes compared to recent years. Companies like Dollar General and McDonald's have flagged weakening consumer demand, particularly among lower-income households, reflecting the reduced spending power that has followed the end of COVID stimulus programs.

However, one demographic is defying the broader trend. Gen Z and millennials are not only sustaining, but actively driving consumer spending. According to American Express, these age groups are outspending baby boomers by five times, with discretionary spending powering sectors such as leisure, dining, and online gaming​. This is despite the fact that many members of these generations still live with their parents, who cover significant living costs.

Approximately 45% of young adults between the ages of 18-29 continue to live at home, benefiting from an average of $1,384 per month in financial support from their parents​. This support extends to housing, groceries, and even cellphone plans, which reduces the burden of essential expenses and frees up more disposable income for non-essential purchases like technology and experiences​. This dynamic is crucial as housing affordability worsens, with nearly half of U.S. tenants spending over 30% of their income on rent. For Gen Z and millennials, the ability to avoid these costs allows them to participate in consumer markets more aggressively than other generations.

Moreover, with this age cohort representing 20% of the U.S. population, their spending power is pivotal. Though they may not yet own homes or face significant financial obligations, their influence on the economy cannot be ignored. Morgan Stanley expects Gen Z and millennials to be key drivers of U.S. GDP growth into the 2030s).

MY ANALYSIS

The financial behaviors of Gen Z and millennials present both opportunities and risks. Their ability to spend at such high levels - despite the broader economic pressures - is largely fueled by external financial support from their parents. This reliance creates a fragile foundation. If parental subsidies begin to dwindle, this generation’s consumer power could contract rapidly, especially in a high-inflation environment where rent and housing costs continue to skyrocket.

From an investment perspective, while there are clear opportunities in sectors like fintech, entertainment, and luxury retail that cater to Gen Z and millennials, there’s also significant risk tied to their dependency on outside financial help. Companies that thrive on discretionary spending should be wary of the potential slowdown in these consumers’ financial flexibility if the macroeconomic environment worsens or if generational wealth transfers slow.

In my view, the sectors most exposed to Gen Z and millennial spending should prepare for a recalibration in demand. As long as parental subsidies hold up, companies catering to experiences, entertainment, and lifestyle brands will see ongoing robust demand. However, inflationary pressures and an overheated housing market could trigger a shift in spending priorities, forcing this demographic to tighten their wallets.

In conclusion, while Gen Z and millennials have kept the U.S. economy buoyant with their high discretionary spending, their reliance on parental support raises questions about the long-term sustainability of this trend. For investors, it’s crucial to balance enthusiasm for their current spending power with caution about what could happen if this generation’s financial dynamics shift. The upcoming BLS report will likely shed more light on these critical economic forces and should be closely watched by those in finance and investment.