WASHINGTON The U.S. economy faces the grim prospect of surviving a consumer-led recession without the full spending power of the Baby Boomers who helped to keep the last two downturns short and shallow.
Retirement is fast approaching for many of the 76 million-strong generation born in the nearly two decades following the Second World War. The oldest members of that group turn 62 this year, which is the earliest age to collect Social Security retirement benefits.
Much of their savings is tied up in home equity and stock market investments, both of which are now under pressure as the housing and financial sectors stumble. The housing slump and subsequent credit contraction have already taken a toll on U.S. spending and employment, leading many economists to conclude that a recession is close at hand.
"In the early 1980s, early 1990s and the last recession in 2001, as rough as it was for the economy, the boomer could still be relied upon to put a floor under the consumer," said David Rosenberg, an economist with Merrill Lynch in New York.
Rosenberg expects the worst consumer recession since 1980 as aging boomers retrench, adding to the pain of rising unemployment, lost housing wealth, and slumping stock prices.
Boomers have been a powerful spending force for the past three decades, driving demand for homes and cars and lifting sales at restaurants and retail stores. They boast about $3 trillion in annual income, according to data compiled last fall by AARP, the organization for people over 50 years old.
They also have been a big reason for the paltry U.S. saving rate of close to zero, as they took advantage of housing and investment wealth to fund their lifestyles. But as this wealth wanes, boomers may seek to rebuild their nest eggs by spending less than they earn, instead of relying largely on capital gains.
Concerns about financial security are already apparent as boomers contemplate rising health-care costs and longer life expectancy. A recent KeyBank and Zogby International survey found that 67 percent thought they may run out of money in their lifetime.
While economists have long stressed the need to boost national savings, doing so now when the economy is in serious danger of recession could make matters worse. Rosenberg said his economic models suggest the personal savings rate could eventually hit 4 percent. In December, it was 0.2 percent.
"It is unfathomable to think of what such a move in the savings rate would do to consumption growth, barring an absolute explosion in disposable income growth," he said.
TIME ON THEIR SIDE?
The boomer years run from 1946 through 1964, so the youngest members are only in their 40s, which puts them in the peak of their spending years. That will certainly help to blunt any spending blow from boomers nearer to retirement, said David Certner, legislative policy director with AARP.
However, roughly two-thirds of boomers are 50 or older. If history is any guide, older boomers are likely to pull back should the stock and housing markets continue their descent.
After the technology bubble burst, leading to the 2001 recession, AARP surveyed investors aged 50 to 70 on how they were coping with the stock market slide.
More than three quarters of those polled said they had lost money in stocks, mutual funds or other investment accounts. Of those, two-thirds said they had adjusted their lifestyle as a result, including budgeting more carefully, taking fewer vacations, and putting off major purchases.
The U.S. Federal Reserve is clearly worried about the link between stock market wealth and spending. In a pivotal January 10 speech that set the stage for two rapid-fire interest rate cuts this month, Fed Chairman Ben Bernanke listed equity prices among the factors likely to weigh on consumer spending.
Recent stock market losses are not as severe as they were after the dot-com collapse, but the housing market is far worse. That is likely to have even bigger repercussions for spending because homes account for a heftier chunk of savings.
"We're talking about a massive loss of wealth," said Dean Baker, an economist and co-director of the Center for Economic and Policy Research in Washington.
"Prices are just plummeting. You have someone who's in their 50s, maybe even 60s, and they're counting on the equity in their home to be a major source of their wealth in retirement. They just saw their home price fall 15 percent. They're in real trouble," Baker said.
A Reuters/Zogby poll conducted in mid-January found that Americans aged 50 to 64 felt pretty good about their financial situation, though they acknowledged that the housing market was set for a protracted slump.
Of those polled, nearly 60 percent rated their financial situation "good" or "excellent," making them more optimistic than the overall population. However, less than 20 percent thought home prices would rise in their area over the next year, while the wider population was less gloomy.
Nearly half expected a recession in the next year.
Older workers are particularly vulnerable in downturns. Baker said worries about job security and paying for retirement may prompt boomers to pocket rather than spend any rebates they receive as part of a stimulus plan of some $150 billion moving its way through Congress.
"If people do end up saving it, obviously it doesn't provide very much stimulus," he said.
(Additional reporting by Brad Dorfman in Chicago; Editing by Andrea Ricci)