The Affluent Recession Ahead

 

I warn in my new book, out January 7, that the U.S. has a second Demographic Cliff coming, at the same time as countries like Germany, Austria, Switzerland, and the U.K. see their demographic trends start to decline.

In the U.S., this will come from the affluent sector – the top 10% to 20% – who will see their spending decline.

Although the spending for the average baby-boomer household peaks at age 46, the most affluent of that generation only hit their peak spending between ages 50 and 54.

As you can see in this chart, when we look at total consumer spending by age from the last 10 years of the Consumer Expenditure Survey, thanks to the U.S. Bureau of Labor, age 53 seems to be the end of a broader plateau in spending…

See larger image

Note that this chart and over 100 consumer-sector charts are in our research report, Spending Waves, which you can access here.

Now, as you can see, there’s a plateau from age 39, when spending on housing starts to peak (between age 37 and 41) and age 53 when spending on autos peaks. Furniture peaks in the middle at age 46, when overall spending peaks.

The peak Baby Boomers first hit this plateau in 2000 when they turned 39. Growth was slower after that and then tech bubble burst. They peaked overall in 2007 when the peak turned 46 and we saw the next bubble burst in 2008. The end of this plateau will hit by the end of 2014 when they turn 53. I expect the final bubble to burst in 2014, likely in the first quarter.

The first thing you need to understand is that the top 20% who control over 50% of the spending, and who are almost entirely benefiting from the stimulus-inflated financial asset bubble, will peak in their spending and start to slow by the end of 2014… just as Homer Simpson and most households did in late 2007.

I’ve been saying this for years.

But I’ve also been warning that the most affluent, that top 5%, will see higher taxes come April 2014 or October 2014 if they file for an extension. And it seems like they just don’t see it coming.

They’re so busy not being unemployed, counting their stock gains, and buying expensive products that they’re not anticipating just how much they’re going to pay in extra taxes next year.

Brittney Saks at PricewaterhouseCooper says their clients are “in for a shock” when they file in 2014.

Joe Perry at Marcum looked at the returns for the company’s 1,200 clients and estimated the average rise in taxes in 2014 will be 7%.

Seven percent on people who make $400,000 or $600,000 or more a year isn’t chump change. On $400,000, where the most onerous changes hit, that’s $28,000. Ouch.

When people suddenly face paying that much more in taxes, they’re likely to cut back spending on something. Personally, I’ve already made some changes to my spending that aren’t insignificant.

Where will all the increased taxes come from?

Well, the Medicare surcharge will go up another 0.9% to 3.8% on returns over $200,000 or $250,000 for joint filers, and that 3.8% is now added to net investment income.

How smart to tax the artificial gains from the Fed inflating financial assets!

The marginal income tax rates go up from 35% to 39.6% for $400,000 to $450,000 filers, and at those levels personal deductions of $3,900 per person disappear. That can mean losing $15,600 in deductions for a family of four. Many other deductions will expire as well.

The top 5% that is largely impacted by higher taxes accounts for 30% of income and at least 25% of consumer spending, which is 70% of GDP. They also pay 59% of federal income taxes. A 7% decline in spending by this sector could, on its own, cause GDP to fall 1.2%.

Then a steep natural decline in their demographic spending curve hits by 2015 just after this tax shock hits this year.

My prediction is this: a recession will very likely start by the 3rd quarter of 2014 and will only deepen as we move into 2015. And we’ll have the rich shrinking their spending and leading such a downturn this time, not Homer Simpson. This is not good news for stocks like Tiffany that are doing so well.

Get out of stocks by early 2014 as the Fed will have no one left to stimulate into overspending and investing when the rich finally fall off the Demographic Cliff.

Harry

 

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Categories: Economy

About Author

Harry studied economics in college in the ’70s, but found it vague and inconclusive. He became so disillusioned by the state of the profession that he turned his back on it. Instead, he threw himself into the burgeoning New Science of Finance, which married economic research and market research and encompassed identifying and studying demographic trends, business cycles, consumers’ purchasing power and many, many other trends that empowered him to forecast economic and market changes.