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Baby Boomers forgoing purchases blunt Fed stimulus

story by Elizabeth Dexheimer and Jeff Kearns
Bloomberg News

John Rodwick cuts corners so he has money to spend on his seven grandchildren and cruise around the Rocky Mountains with his wife, Jean, in their blue-trimmed Roadtrek motor home.

“My wife and I love to travel, so that is our one big expense, but we are very, very conservative,” cooking and sleeping in their 19-foot vehicle, said the 72-year-old former business professor.

With the value of their three-bedroom home plunging 30% in the past six years, the Rodwicks have become “very cost conscious,” he said.

Federal Reserve officials say they’re concerned that retirees like the Rodwicks are blunting the impact of record easing aimed at creating jobs. The reason: Older people are more likely to forgo purchases of houses, cars and other big-ticket items that the Fed is trying to encourage with near-zero interest rates. And their numbers are growing, making the Fed’s task ever harder.

“Spending decisions of the older age cohorts are less likely to be easily stimulated by monetary policy,” William C. Dudley, president of the Federal Reserve Bank of New York, said in a speech on Oct. 15, helping to explain why the economic recovery has been weaker than expected.

Each day, some 10,000 of the 78 million Americans born between 1946 and 1964 – the so-called baby boomers – turn 65. The share of the population in that age group will swell to 18 percent by 2030 from 13% last year, according to the Pew Research Center in Washington.

IMPACT MAGNIFIED
People usually save more as they near retirement. Now, the effect is magnified because Americans’ wealth has been depleted by the financial crisis, which decimated home values and retirement accounts invested in stocks, according to Britt Beemer, chairman of America’s Research Group Ltd., a Summerville, S.C.-based consumer-behavior research company.

From 2007 to 2010, the median U.S. household net worth fell by 38.8% to $77,300, the lowest level since 1992, the Fed said in June in its Survey of Consumer Finances.

The saving rate in the U.S. has averaged 4.3% in the 39 months since the recession ended in June 2009, compared with an average of 2.3% in the same period before the start of the recession in December 2007.

Retirees and older workers probably will reduce spending as they anticipate tax increases and cuts in Medicare and Social Security, said Dudley, who is vice chairman of the policy-making Federal Open Market Committee.

INCOMES HIT
Meanwhile, retirement incomes are being hit by the very Fed policies that are intended to spur the three-year economic expansion and reduce an unemployment rate stuck near 8% or higher since early 2009.

Fed Chairman Ben S. Bernanke on Oct. 24 reaffirmed a plan to buy $40 billion of mortgage-backed securities a month and keep the main interest rate near zero at least through mid-2015. The Fed has pursued a zero-rate policy since December 2008 and has already purchased more than $2.3 trillion in bonds.

Risks to the U.S. posed by slowing global growth and the European debt crisis are also among the reasons the Fed is keeping interest rates low. Most U.S. stocks fell, following the worst weekly drop since June, as investors awaited budget talks in Washington and results of a European meeting on Greek aid. The Standard & Poor’s 500 Index was little changed at 1,380.03 at the close of trading in New York.

Japan’s economy shrank last quarter as exports tumbled and consumer spending slumped, Cabinet Office data showed today in Tokyo. Gross domestic product fell an annualized 3.5%, the most since the earthquake and tsunami in early 2011.

INTEREST EARNINGS
While the Fed’s policies stimulate the U.S. economy by making it cheaper to borrow -- the average interest rate on a 30-year fixed-rate mortgage was 3.4% in the week ended Nov. 8, close to the lowest on record – they also reduce interest income for savers.

The interest rate on a five-year certificate of deposit fell below 1% for the first time on Sept. 20, according to North Palm Beach, Florida-based Bankrate.com. On Nov. 7, the national average rate for the five-year CD was at a record low of 0.94%.

“All this money-printing hurts savers,” Republican Representative Paul Ryan of Wisconsin, his party’s vice presidential nominee, said during remarks at an AARP event in New Orleans on Sept. 21. “It threatens the future value of our money – and seniors are bearing most of the risk.”

Bernanke says the scant return for savers is preferable to the losses they may suffer if the central bank were to begin raising interest rates too early.

SIGNIFICANT HARDSHIP
Bernanke, in an Oct. 1 speech in Indianapolis, said low interest rates have “involved significant hardship for some.” Still, if the Fed “were to raise rates now, before the economic recovery is fully entrenched, house prices might resume declines, the values of businesses large and small would drop and, critically, unemployment would likely start to rise again.”

Many retirees are staying in their homes, moving closer to their children or getting smaller houses with less upkeep, instead of traveling or buying luxury items and second homes, Beemer said.

“The practical has taken over the aspirational,” he said. “If you’re not moving from your home and not moving to a brand new home when you retire, all those furniture items you might have purchased are no longer on the shopping list.”

ADULT CHILDREN
The postwar generation is shifting spending toward education, mortgage debt and their adult children and away from entertainment, dining, furniture and clothes, according to a report last month from the National Center for Policy Analysis, a Dallas-based research group that advocates free markets.

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Retirees are consistently more frugal than younger age groups, said Pamela Goodfellow, consumer insights director at BIGinsight, a research company based in Worthington, Ohio.

“If you’ve got to put your kid in college, you’ve got to spend,” she said. “Retirees have almost a luxury of not having quite so many spending demands put upon them.”

The demographic shift will benefit companies such as UnitedHealth Group Inc., the largest U.S. health insurer, and TEVA Pharmaceutical Industries Ltd., which manufactures generic drugs, according to James Kee, who helps oversee $1.9 billion as president of South Texas Money Management Ltd., in San Antonio, Texas.

Also likely to benefit: manufacturers and retailers of discount consumer products, according to Brian Jacobsen, who helps oversee $207.5 billion as chief portfolio strategist at Wells Fargo Advantage Funds in Menomonee Falls, Wisc.

Retirees will “be more price sensitive, and so perhaps that’s going to benefit those businesses that really target some of the lower price points,” he said.

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