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The NEW Trancession

By: | Tags: , , , , , | Comments: 0 | January 28th, 2016

Two weeks ago, we discussed the lack of investment in healthcare technology, Monstrous Digital Healthcare Gap in the U.S. In last week’s Blog, we discussed a few items that lead away from, and then back to, healthcare and technology, The Next Digital Revolution. Today, I will try to bring both ideas together, and more importantly, get a little deeper in to the economics of our generations, and where healthcare is. Next week we will do the big numbers.

First, I am no economist, and for sure I am no financial analyst; but there are two things that have guided my path in healthcare, and those are demographical economics and technology. At present, those two items are, in my opinion, changing the world.

I went into healthcare by choice, not by accident. As a younger baby-boomer myself, I could see how my generation of 77 million was going to hit healthcare at a full gallop. While my generation has changed everything for over 60 years, it was, and still is, changing healthcare. We are also changing economics worldwide. We can’t talk too much about Baby-Boomers today without also talking about the Millennial generation, sometimes called the “Echo Boomers”.

I am going to try to make a point that the convergence of these two generations could be causing havoc to the status quo, and that change may have only just begun. There are also staggering opportunities. It is that fascination with demographics that has kept my attention to the trends that Boomers and Millennials are disrupting.

Let us identify who the Boomers and Millennials are. A recent article on NPR put a box (generally) around that issue by stating:

“We’ve defined millennials as those born between 1980 and 2000; Generation X, between 1965 and 1979; and baby boomers, between 1946 and 1964.”

If you like, you can use the footnote below and see a great deal more information, as well as an excellent report by the PewReseach Center.

The theory that I want to propose here is related to the difference between Boomers and Millennials, and why healthcare, technology, and clearly the combination of the two, is the best place to look for growth.

The thesis is, the differences in needs, wants, desires and action is causing the economic condition in the U.S. to shift materially, which is also in part affecting the world. Think of it as the butterfly effect millions of times over.

We Boomers defined consumerism in the second half of the 20th century. We had a race to accumulate things, from toys as children (and adults) to homes, cars and “stuff” as adults. As a generation, most of the time, we didn’t even take advantage of all our vacation time, that says something about us. We love to work and as soon as technology let us take our work with us on vacation, we did. That’s not to say we didn’t alter vacations, and leisure time- we did; but even at the end of those experiences, we brought home more stuff, not just experience. The Millennials seem to be nearly the opposite, collecting experiences and digital pictures and not things. I for one still have 1,000 Kodachrome slides somewhere in my closets and 10,000 physical pictures in boxes, plus VHS camera, and videos. Why did we buy so much stuff?

In a U. S. Census report titled The Baby Boom Cohort in the United States: 2012 to 2060 we find some fascinating things. The graph I find most interesting is in the middle of page 8. There you will find the generation’s chart which shows the Boomers in 1990 were in their late 20s and mid-40s. I was born in 1959, so in 1990 I was 30. Generally, those are considered high consuming years.

In my case, I was married, owned my home, and had a child. By the mid-90s, the entire Baby-Boomer’s generation hit their high consuming years. Maybe the entire 90s economic boom was driven solely by Baby-Boomer demographics? Now for the next 20 years, through 2036, those Boomers are going to consume healthcare products, and services like no other generation has in history.

As noted above, Boomers started turning 70 this month, and will turn 70 effectively at the rate of 10,000 a day, for two decades. I am 15 years away. Boomers do still have spending power.

“Boomers represent 44% of the US population, and their buying power is considerable: in the next 5 years, they’re projected to hold 70% of US disposable income and buy 49% of total consumer-packaged goods (CPG), according to August 2012 report by Nielsen and BoomAgers. In fact, Boomers dominate purchases in 119 of 123 CPG categories, and have the money to spend: despite the economic downturn, in 2012, 63% still have at least one person in the household working full time.” 

Let us refer back to the Millennials. What are they doing now?

Besides their clear preferences for experiences versus accumulation of stuff, with one clear exemption – technology. They love technology at every level. They are better educated and have more, way more academic related debt, than any previous generation. There is another fact that I find of great economic interest. From the NPR report:

“..millennials are delaying marriage and babies and taking time to “find themselves” in their 20s. The average age of first marriage is 27 for women and 29 for men, up from 20 for women and 23 for men in 1960, according to a recent Pew Research Center report. Some millennials — 34 percent of 25- to 34-year-olds — are waiting longer to get married for financial reasons.”

“And while millennials are waiting to put a ring on it, many are in committed relationships. About 9.2 percent of millennials cohabit, compared with 5.8 percent of Gen X-ers. And 24 percent of now-married millennials say they bought a home with their current spouse before tying the knot.” 

“Finally, millennials aren’t just waiting to get married — marriage is simply less important to many of them, too. The 2014 Clark University Poll of Established Adults also found that 1,000 young people between 25 and 39 do not consider marriage one of the major markers of adulthood. And a Pew analysis of census data projected that 25 percent of millennials will never marry at all.” 

Another item of the Millennials that I find both fascinating and a bit disturbing for the U.S. economy is household formations. The Wall Street Journal reported on August 18, 2015 this headline: Seniors, Not Millennials, Are Creating New Households. Now you can see where I am going with this? Further, if you link that with U.S. Homeownership Rate Hits 48-Year Low , plus Boomerang’s – Millennials Get Cozy at Home and one last one, The Morning Download: GM Launches Car-Sharing, as IT Compels Massive Change in Business Model , what do we have? We have the Millennials. The finest educated most independent, self-aware, connected generation in U.S. history, changing everything their parents did. They will – based on simple actuarial and biological tables – marry later, have kids later, have less kids, buy less cars, buy less and smaller homes.

Bloomberg BusinessWeek published on July 11 2016 an article titled, “Less for Less” detailed that “builders trim home sizes and cut prices to appeal to Millennials.” The article when on to say they are reducing the number of rooms, amenities, and even the size of garages and porches. The homes are up to $100,000 cheaper than other homes in the market.

From what I understand, they are not “delaying” engagement in to the consumer society, as a friend in the investment world noted to me. I think they are changing everything. I believe they don’t want to have a huge house in the suburbs. They are driving the urban core regeneration, I has seen it and helped move them. They don’t want grass to attend to, maintain pools they don’t use, or a garage full of tools and things most homeowners have. If they need a drill, they will call their parents, or a friend to borrow theirs, or simply rent one on online. They don’t want to store it or move it. They just don’t want it, period.

In those smaller homes, they will need less carpet, less window covering and less tile, etc. They will not fill every room with furniture, and best I can tell how they furnish their apartment or home is more functional than it is to show off to their friends.

Now, if that is all even reasonably true, the Baby-Boomer and the last 70 years (January 1946-) are not the norm, but the bubble. What if Millennials consume less, or spend it differently?

The Federal Reserve Bank of St. Louis publishes as amazing graph “Personal Consumption Expenditures/Gross Domestic Product” you should see it. This graph, though it starts in my birth year of 1959, shows something amazing; and when you link to data from U.S. Census Bureau (page 881) , you can drill down as much as you wish. What if it went to the peak of 1983 at 63.1% from today 68.4% (peak was 69.0 in 2011)? What would happen to the U.S. Economy? In 1983 the average Baby-Boomer was 30.

The question is this – if the Baby-Bombers have been driving the outsized growth in consumption, and now they are by all accounts buying less and saving some, can the Personal Consumption Expenditures/Gross Domestic Product drop? If so, how much and how long?

Some interesting facts from Financial Times article written in 2013

“The early 1970s marked the start of the new boomers’ impact on the economy, as they began to join the wealth creator 25 to 54 age range. Consumer companies recognized this as being the period of peak spending, and the boomers’ arrival led to a sustained surge in demand and high inflation.”

“Previous economic cycles had typically lasted five years, with 12 to 18 months of recession, but between 1983 and 2007, the US suffered just 17 months of recession in 25 years.” 

One more number- the U.S Stock Market breached 1,100 as measured by the Dow Jones Industrial Average on February 24, 1983 (I was 23 years old) . I actually remember the day. To be honest, I was short in the market, a day I will never forget, if a live to be 100. What has happened to the stock market between 1983 and 2000? We can discuss the new highs of 2015 separately, and maybe in the context of huge economic stimulus, not economic activity or even corporate profits. Related also is the fact that Millennials are not in buying stocks . Maybe “not yet,” or maybe never. They lived and felt the Great Recession either directly and/or though their parents, I get a feeling they don’t trust the markets or big banks. They have different values on business loyalties than their parents.

I would argue that since 2000 everything has changed, and people are expecting things (economic conditions) to again return to the “roaring 1990s” or the “good old days.” I don’t see how, with the current trend of Boomers and Millennials that is possible. We discussed all of this, and more, in last week’s blog on the historic plateauing of worker productivity in the U.S.

I find one interesting fact, and this feeds in to the theory on Boomers. With full disclosure, I am a card carrying member and amateur radio operator (KK4REC); and according to The National Association for Amateur Radio (ARRL), it reported in 2015 that in the age of smart phones, wireless internet, and at a time when people are disconnecting their “landline,” the ARRL “US Amateur Radio Numbers Reach an All-Time High” . Now don’t laugh people, really. As reported by ARRL:

“Amateur Radio growth in the US continues to soar. At the end of 2014, the total number of radio amateurs in the FCC’s Universal Licensing System (ULS) database reached an all-time high of 726,275. The trend has continued in the first 2 months of 2015, which saw the ham population rise to slightly more than 727,000.”

“In the past 40 years, the number of Amateur Radio operators in the US has grown at a remarkable rate: 

December 1971: 285,000 

December 1981: 433,000 

December 1991: 494,000

December 2001: 683,000

December 2012: 709,500” 

I am not saying that this is conclusive, but very supports my theory. The interesting fact is that the Federal Communication Commission is practically running out of licenses of the old model of 3 or 4 digits and issuing more letters and is now up to 5 digits. That is the Boomer bubble as they enter their 50s, and 60s.

Now what?

This week the U.S. Congress Budget Office (CBO), a non-partisan Agency that does budget analysis for Congress, reported on the long term budget of the U.S. The report looks at the current 2016 budget and forecasts 10 years ahead to 2026 . The entire report makes for interesting reading, but it’s not great news for most Americans.

As is my nature, I look at healthcare first, and that part is located in Chapter 3, Table 3-1.

For those that don’t get as excited as I do reading the CBO reports, (I am on their distribution list), the numbers for healthcare are amazing. The numbers stager even me, and these numbers are just Medicare and Medicaid. More on the total long-term cost in a future blog.

In 2015, the US spent a total of $984 billion (USD) in both U.S. Government programs (this does NOT include the States portion of Medicaid) or commercial insurance, or individual insurances. This number represented a total of 5.6% of total Gross Domestic Product (GDP) for 2015. In 2026 the CBO project that number will be $1.9 trillion (USD) and will represent 7% of GDP. The CBO numbers also assume some very important growth numbers. The Wall Street Journal noted of the CBO numbers:

“This assumes that the economy grows by 2.7% this year and 2.5% next year before levelling off to an average of 2%, which also assumes there is no recession even though this expansion is already long in the tooth into its seventh year.” 

I don’t need to make an editorial on the WSJ, but the risk as I see it is, the cost of Medicare and Medicaid will likely be higher. We are in the 7th year of the current expansion. Could we do another 10 years without a recession?

Now you understand why, when I meet a student that asks me what career offers the best security, without hesitation I tell them healthcare, and if possible, healthcare technology. Not all healthcare is created equal. It is such a large industry that is has “emerging, stable and descending segments,” but you would expect that of any large industry.

Think about this fact for a second- the U.S. Healthcare industry alone is larger than the entire economy of the United Kingdom or France.

So, why the title “Trancession”?

I believe that we are in the intergenerational transition of two great generations, which is causing recessions or contractions in some industries, and expansion in others. When these two generations are on the same path, watch out! Boomers love technology. It was practically invented for us. From the Color TV to the cellular phones. Can you see a Millennial using a Motorola “Brick” Cell phone? They don’t know how good they have it.

Look at the graph below on grocery sales vs. restaurant sales. For the first time in history we Americans are spending more money in restaurants than on groceries. I believe that is both the Boomer and Millennials eating out. The Boomers because they feel they deserve it, and don’t want to cook for just themselves, and millennial who grew up in restaurants with their parents.

All these words are a warning, if you are not in to healthcare or technology and technology driven solutions, tread carefully. One is driven by the generation that has driven everything for 70 years and the other combines the Boomer and Millennials for now. We will see how those change over the next decade.

– Noel J. Guillama, President

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