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The Link between Demographics, Inflation, Consumer Spending and Equity Returns

The Link between Demographics, Inflation, Consumer Spending and Equity Returns

Issues to be addressed in this research paper

It is widely understood that, in absolute terms, demographics impact consumer spending in a meaningful way, i.e. consumer spending drops as society ages. It is also well understood that certain goods and services are favoured more by certain age groups than by others. For example, healthcare products and services are taken up much more widely by the elderly, whereas the largest buyers of music are young people.

However, when discussing this topic with others – whether internally or externally – it has become obvious to me that most people’s knowledge of the subject is still relatively superficial. The purpose of this research paper is to provide more detailed information of how spending patterns change as populations age. This knowledge can hopefully be used to the advantage of our clients when we engage in portfolio construction.

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Why consumer spending is so much higher in the U.S.

As is now familiar, C is a measure of personal consumption expenditures (in the following called consumer spending) in the national accounts, which go into the calculation of GDP as follows:

GDP = C + G + I + (X – M)

Consumer spending accounts for a substantial share of GDP in all countries but is exceptionally high in the U.S., where it accounts for over 70% (Chart 1).

Chart 1: U.S. personal consumption expenditures as a % of GDP
Chart 1: U.S. personal consumption expenditures as a % of GDP
Source: Federal Reserve Bank of St. Louis

In reality, it is only that high because of how healthcare expenditures are accounted for in the U.S. as opposed to most other countries, where the vast majority of healthcare expenditures count as government spending (G in the formula above). In the U.S., on the other hand, most healthcare expenditures count as consumer spending because of the private status of large parts of the industry.

Secondly, much more money is spent on healthcare in the U.S. than elsewhere, both when measured in absolute terms and as a % of GDP. This is probably a function of the model I just referred to; i.e. because most healthcare spending is private in the U.S., insurance companies play a significant role, and they are expensive.

All in all, Americans spend approx. 17% of GDP on healthcare (see here) whereas, here in Europe, ‘only’ 10% of GDP goes towards healthcare. In the U.K., it is a bit over 9%. Having said that, for the reasons I just explained, it is probably fair to assume that, on a like-for-like basis, consumer spending in the U.S. really isn’t that different from other DM countries.

A quick review of the age profile in various countries

The age profile of the population is very important in the context of consumer spending. As we have access to trustworthy information as to when consumer spending actually peaks - i.e. at what age – one can paint a fairly reliable picture as to what can be expected going forward spending-wise.

As far as the U.S. is concerned, the 50-54 year olds make up a large (but not the largest) share of the population. Unlike in most other countries, there is also a considerable number of echo boomers – children of the baby boomers – and the 20-24 year olds actually make up the single largest age group in the U.S (Chart 2).

Chart 2: U.S. population by age and sex
Source: United Nations

We have access to similar information on most other countries (courtesy of the United Nations). The 45-49 year olds make up the largest age group in the UK (Chart 3a), whereas two age groups stand out in Germany – the 45-49 and the 50-54 year olds (Chart 3b). Japan is a little different. The 60-64 and 65-69 olds are both very large groups but, unlike in other countries, the 40-44 year olds actually make up the largest age group (Chart 3c).

Chart 3a
Chart 3b
Chart 3c

Chart 3a-c: Population by age and sex in various countries
Source: United Nations

This could cause Japanese consumer spending to positively surprise in the short term - but it is only a blip - as the 40-44 year olds approach the age of peak spending (more on this later). Meanwhile, it is widely perceived that Japan passed the point of no return age-wise all the way back in the 1990s.

This information, combined with knowing at what age consumer spending actually peaks, can be used to establish approximately when total consumer spending will peak (or has peaked) in each and every country. In almost all DM countries, overall consumer spending peaks when people are in their mid-40s. For example, in the U.S., it happens when people are 46. Here in the UK, it happens when people are 45. Other DM countries may vary marginally but typically only by a year or two.

In this context, I should also mention that peak spending varies with income. For example, in the U.S., consumer spending peaks at the age of 51 for the top 10% of all income earners, and it peaks at the age of 54 for the top 1%. It is therefore not unreasonable to expect that spending on luxury goods will peak a few years later than overall spending.

It is also worth mentioning that peak spending only changes at a glacial pace. One can therefore safely assume that what goes down as the peak spending age this year, will also be so next year. Our findings have led to the following conclusions in terms of when consumer spending peaks in different countries (Chart 4).

Chart 4: Consumer spending peak times in various countries
Chart 4: Consumer spending peak times in various countries
Source: Dent Research

As one can see from the above, some of the largest European countries have already peaked, and so has the U.S., which at least partly explains why the global economy is struggling to gather economic momentum, following the Global Financial Crisis.

It is also noteworthy that the younger age groups in Germany and Japan account for a much smaller share of the overall population, than they do in the U.S. and the U.K. The obvious consequence of that is that consumer spending in those countries will remain comparatively weak for much, much longer than what can realistically be expected in the U.S. or the U.K.

How does the age profile impact inflation?

Few populations are yet so old that we have reliable data on how ageing impacts inflation, but Japan is the exception. With a median value in excess of 46 years of age (it is 37.6 in the U.S. and 40.4 in the U.K.), Japan is one of the oldest countries in the world and, as I pointed out above, is a country where spending peaked in the early 1990s.

The early 1990s also happen to be the last time CPI in Japan rose by more than 2% per annum and, as Barclays documented in a 2014 research paper, ever since the early 1980s, Japanese consumer inflation has correlated closely with the size of the country’s workforce, which again is a function of the age profile (Chart 5).

I obviously cannot be absolutely sure that the picture will repeat itself elsewhere, but I am struggling to see why not. I would therefore expect age to have a negative impact on CPI in almost all other DM countries, but the most significant impact is likely to be in the Eurozone, where the age profile is most similar to that of Japan.

Chart 5: Japanese working age population and core CPI
Chart 5: Japanese working age population and core CPI
Source: Barclays Equity Gilt Study 2014

How rapidly does consumer spending fall after it has peaked?

We only have detailed information on consumer spending by age group from the U.S. and U.K., and the picture that emerges does actually differ somewhat between the two countries. As consumers age, total spending in the U.S. doesn’t appear to fall nearly as much as it does in the U.K. (Charts 6 and 7).

Chart 6: Average U.S. consumer spending by age ($ per year)
Chart 6: Average U.S. consumer spending by age ($ per year)
Source: Dent Research

However, as I explained earlier, most healthcare expenditures count as consumer spending in the U.S. As the over 75s tend to spend considerably more on healthcare expenditures than other age groups do, it is probably fair to assume that much of what counts as consumer spending in this age group in the U.S., is in reality healthcare spending. As a result, I wouldn’t expect consumer spending in the U.S. to be materially different from elsewhere.

Chart 7: Average U.K. consumer spending by age group (£ per week)
Chart 7: Average U.K. consumer spending by age group (£ per week)

One important consequence of the general trend towards less spending with age is that, despite overall consumer spending already showing signs of slowing in many countries, the trend is likely to gather considerable momentum as the baby boomers age further. Take the UK (Chart 7). The 30-49 year olds are, not surprisingly, the biggest spenders. Spending is on average 12% lower amongst the 50-64 year olds than it is amongst the 30-49 year olds, whereas it falls almost 40% from the 65-74 year olds to the over 75s.

Assuming that consumer spending by age in other European countries doesn’t differ materially from UK spending, I believe that very modest growth in overall consumer spending in Europe is on the cards for several decades to come. As the largest age groups in Germany move into the over 75s it is even possible that overall spending will decline on a structural basis, but that is not going to happen for another 20 years or so.

The Spending Wave

Harry Dent of Dent Research has developed a model that he has named The Spending Wave. It is calculated as the immigration-adjusted number of births every year per country, moved forward (in the case of the U.S.) by 46 years in order to predict the likely peak in spending of the average household. In other words, when the Spending Wave peaks in the U.S., the number of 46 year olds peak (Chart 8).

A graphic illustration of the Spending Wave will tell you when spending will peak, and how steep the fall in spending is likely to be on the other side. The red bars in Chart 8 provide a graphic illustration of the U.S. Spending Wave. As you can see, it peaked in the mid-2000s and has dropped somewhat since. It will continue to fall until the early 2020s but, after a few flattish years, it will begin to rise again in the mid-2020s. After the recovery phase, which is likely to last until the mid-2030s, we can expect it to move broadly sideways until the mid-2050s.

As is also obvious when looking at Chart 8, the Spending Wave correlates quite closely with equity returns. The correlation is not perfect, but there appears to be a strong link, which shouldn’t really surprise anyone, given how consumer spending affects corporate earnings growth.

Chart 8: The link between the spending wave and equity returns (U.S.)
Chart 8: The link between the spending wave and equity returns (U.S.)
Source: Dent Research

I emphasise this link, because the European Spending Wave looks outright ugly for many years to come (Chart 9). On that basis, it doesn’t appear unjust to conclude that European consumer spending, and therefore also European equity returns, are likely to underperform U.S. consumer spending and U.S. equity returns for many years to come. I would emphasise that such a view is long-term in nature and that relative performances over the short to medium term may be very different.

Chart 9: The Western European Spending Wave, 1950-2100
Chart 9: The Western European Spending Wave, 1950-2100
Source: Dent Research

Japan is in an even worse position, partly because the average age is much higher than elsewhere, and partly because consumer spending is affected the most when consumers move into the over 75s (as we saw in Chart 5). For those two reasons it is not unreasonable to expect Japanese consumer spending to really fall off the cliff in the not so distant future.

Opportunities in a low growth environment

If our long term projections for GDP growth in the U.S., Europe and Japan prove reasonably accurate, one would certainly expect inflation in those countries to remain quite modest for many years to come, which underpins our forecast that interest rates will stay comparatively low for a very long time to come – particularly in Japan and on the European continent.

Having said that, a low growth environment is likely to provide plenty of investment opportunities – in particular because people spend their money very differently as they grow older. We know from charts 2-3 which age groups are the largest, and we know from the U.S. Census Bureau when spending peaks on various products. American consumers aged 53, for example, spend more on cars that any other age group does (Chart 10).

Chart 10: The age of peak spending on various consumer goods and services
Chart 10: The age of peak spending on various consumer goods and services
Source: Dent Research, U.S. Census Bureau

It is therefore not entirely unrealistic to expect relatively robust car sales in the U.S. over the next few years despite a generally sluggish consumer environment – and luxury cars should do particularly well, as we know that consumer spending peaks a few years later amongst the highest income earners. I don’t mention this, because we suddenly recommend car manufacturers, but because it serves as an example how the information in Chart 10 can be utilized.

Part 2 of this research paper, which I plan to finish within the next few weeks, will provide plenty more detail as to how all the information in the aforementioned can be utilized in an investment context. I will look briefly at traditional asset classes, but the primary focus will be on alternatives.


As far as the major economic powers are concerned, I would expect demographics to impact consumer spending the most in Japan. The Eurozone is a clear second, with the U.K. coming a distant third. The least affected market is likely to be the U.S., but it would be a grave mistake to assume that demographics will not affect U.S. consumer spending at all.

This has overwhelmingly negative implications for those countries to be hit the hardest and few positive implications. One worth mentioning is an extended period of modest inflation and low interest rates to come. Older people not only spend less, they also borrow less and they save more, which is all deflationary.

Finally, I should emphasise that none of the above is likely to be measurable from one year to the next. A trend like ageing is long-term in nature, and many other factors impact consumer spending in the short and medium term. With that in mind, allow me to finish part 1 of this research paper by quoting the famous investor Warren Buffett:

If you aren’t willing to own a stock for ten years, don’t even think about owning it for ten minutes.

Niels C. Jensen

12 January 2016

About the Author

Niels Clemen Jensen founded Absolute Return Partners in 2002 and is Chief Investment Officer. He has over 30 years of investment banking and investment management experience and is author of The Absolute Return Letter.

In 2018, Harriman House published The End of Indexing, Niels' first book.