WASHINGTON (AP) – Since retiring two years ago, Joan Harris has upped her travel game.
Once or twice a year she visits her two adult children in different states. She is planning several other trips, including to a science fiction convention in Scotland and a Disney cruise soon after, along with a trip next year to Neolithic sites in Britain.
“I really have more money to spend now than when I was working,” said Harris, 64, an engineer who worked 29 years for the federal government and lives in Albuquerque, New Mexico.
Back then, she and her now ex-husband paid for their children’s college educations and put money into savings accounts. Now she’s sparring a bit and for the first time is willing to pay for first class flights. She plans to fly business class to Scotland and has arranged for a higher level suite on the cruise.
“I suddenly realized with my dad getting old and my mom dying, it’s like, ‘No, you can’t take that with you,'” she said. “I could become incapacitated to the point where I couldn’t enjoy anything like going to Scotland or going on a cruise. So I better do it, right?”
Older Americans like Harris fuel a sustained boost to the American economy. Taking advantage of large gains in the stock and housing markets over the past few years, they account for a larger share of consumer spending – the main driver of economic growth – than ever before.
And much of their spending goes to more expensive services like travel, health care and entertainment, putting further upward pressure on those prices — and on inflation. Such spending is relatively immune to the Federal Reserve’s pressure to slow growth and tame inflation through higher interest rates because it rarely requires borrowing.
Wealthy older Americans, if they own Treasuries, may even benefit from the Fed’s rate hikes. These increases have led to higher bond yields, generating more income for those who own such bonds.
The so-called “wealth effect,” whereby rising home and stock values give people the confidence to increase their spending, is a big reason why the economy has defied expectations of a sharp slowdown. Its unexpected strength, contributing to stickier inflation, has forced a shift in the Fed’s plans.
As recently as March, Fed policymakers had predicted they would cut their benchmark interest rate three times this year. Since then, however, inflation targets have remained uncomfortably high, partly as a result of high consumer spending. Chairman Jerome Powell recently made it clear that the Fed is not convinced enough that inflation is continuing to decline to cut interest rates.
When the Fed meets this week, it is confident of keeping its benchmark interest rate unchanged at a 23-year high, the result of 11 rate hikes. The Fed’s hikes have forced up borrowing costs throughout the economy — for everything from home and car loans to credit cards and business loans.
Although the Fed has increased borrowing costs, stock and home values have continued to rise, increasing the net worth of wealthy households. Consider that household wealth grew an average of 5.5% per year in the decade following the Great Recession of 2008-2009, but that since 2018 it has accelerated to nearly 9%.
Stock prices, as measured by the S&P 500 index, are about 72% higher than they were five years ago. Home values rose 58% from the end of 2018 to 2023, according to the Federal Reserve.
All in all, Americans’ wealth has increased from $98 trillion at the end of 2018 to $147 trillion five years later. Adjusted for inflation, the gains are less dramatic but still significant.
“People have had significant wealth gains in equities, significant wealth gains in fixed income, significant wealth gains in house prices, significant wealth gains even in crypto,” said Torsten Slok, chief economist at Apollo Group, an asset manager. “All of that still provides a very significant tailwind.”
The gains are hardly universal. The richest tenth of Americans own two-thirds of all household wealth. Still, the wealth of the median household — the midpoint between the richest and poorest — rose 37% from 2019 to 2022, the sharpest increase since the 1980s, according to the Fed, to $193,000.
Wealth is also disproportionately owned by older Americans. People 55 and older now own nearly three-quarters of all household wealth, up from 68% in 2010, according to the Fed. Percentage-wise, since the pandemic, household net worth has also increased for younger households. But because younger adults started from a much lower level, their gains have not been nearly enough to keep pace with older Americans.
“The baby boomers are the wealthiest retiring generation we’ve ever had,” said Edward Yardeni, president of Yardeni Research. “Not everyone is doing well, but we’ve never had a retirement generation with so much wealth. That’s one of the main reasons the economy is strong.”
That said, many older Americans face significant financial challenges. A quarter of Americans over 50 have no retirement savings, according to a survey by AARP.
Still, as the huge baby boom generation has aged and accumulated more assets on average, they have accounted for an increasing share of consumer spending. Americans age 65 and older provided nearly 22% of consumer spending in 2022, the most recent year for which data is available. That’s the highest of those numbers on record since 1989, up from about 16% in 2010.
One result of the Fed’s higher interest rates has been a sort of bifurcated economy by age. Older, wealthier Americans who already own houses and cars have been much less affected by the Fed’s rate hikes. In contrast, younger Americans endure a combination of expensive home prices and high mortgage rates, making it much more difficult to buy a first home.
Harris, for one, sees this gap in her own family: Her home and car are paid off, and higher interest rates have had little effect on her finances. She recently visited a home in her neighborhood that she was surprised to see priced at $500,000. She bought hers, which she believes could fetch a higher price, for $162,000 in 1991.
Her 25-year-old daughter, Ruby, had a very different experience during a recent visit to an open house near her boyfriend’s Boston-area apartment. An older two-bedroom apartment was for sale for $800,000; it was sold within a week.
Ruby considers herself lucky to have a well-paid job as a materials engineer. But that apartment price still seemed astronomical. She loves the area, especially for its walkability, but doubts she’ll ever be able to afford a house there.
“In the long term, it’s probably not going to be affordable to live here,” she said. “Whereas the Midwest is more affordable, but won’t have the neighborhoods that I like.”
Economists calculate that while the wealth effect generally has a relatively modest effect on spending, it may be larger now. That’s because Americans of retirement age, who are more likely to spend their wealth, make up a larger portion of the nation: Americans age 65 and older make up about 17% of the population, up from 13% in 2010. And people with stock holdings can now easily access their account balances online, increasing their awareness of increases in their net worth.
Research by Michael Brown, an economist at Visa, and others has also found that significant stock market wealth typically increases spending on discretionary items like restaurants, travel and entertainment — sectors of the economy where spending rises and inflation remains high.
The Conference Board, a business research group, asks Americans in its monthly survey of consumer confidence whether they are planning an overseas vacation in the next six months. Slok noted that more than one in five households say they are — a record high on records dating back to 1967.
Cruise operator Royal Caribbean just reported earnings and strong demand “leading to higher prices for all of our key products,” CEO Jason Liberty told investors. “Consumer sentiment remains very positive, bolstered by resilient labor markets, wage growth, stabilizing inflation and record household net worth.”
Last week, the Fed’s preferred gauge of inflation, excluding volatile food and energy costs, rose 2.8% from a year earlier, a sign that inflation remains sticky. Solid consumer spending, particularly on services, was a key factor. In a measure of services inflation that the Fed watches closely, prices rose 3.5% from a year earlier, far higher than is consistent with its 2% inflation target.
