Market Watch : Slump May Dim Broker Hopes of Baby Boomer Boom

The gathering clouds of recession have cast a shadow over some Wall Street officials’ hopeful predictions that the aging of the baby boom generation will soon give the securities industry a badly needed boost.

These forecasters have argued that the maturation of the post-World War II generation would soon bring a rise in the personal savings rate, which has been in an alarming decline since the early 1970s. Led by economist Edward Yardeni of Prudential-Bache Securities, advocates of this view have predicted that in the coming decade the generation would no longer need to spend so much on homes and children and would start setting more aside for retirement.

As some of these savings flowed to stocks and bonds, the securities business would feel a sharp stimulus, Yardeni and others have argued.

But the recession has already slowed the rise in the savings rate. Now, even the most optimistic forecasters don’t expect the trend to pick up much steam until 1992 at the earliest.

The savings rate--usually calculated as a percentage of disposable income--peaked in 1973 at an annual rate of 9.3%. The figure tailed off sharply during the 1980s, bottoming out in 1987 at 2.9%.

The rate rose to 4.2% in 1988 and hit 4.5% last year, prompting a prediction from Yardeni that the figure would rise to 10% in 1993. As it did so, he said, it would help lift the Dow Jones industrial index to 5,000.

But the rate slumped to 4% in the third quarter of this year, and many economists believe that it will remain lower for several quarters at least.

The savings rate doesn’t always fall during recessions. Often in such periods it falls off initially, as consumers spend more of their income to maintain their standard of living, then rebounds, as consumers tighten their belts for hard times.

But in this recession, economists note, consumer spending so far has remained relatively strong. It is still growing at a 1.3% rate this year, down from 3.6% in 1988.

Yardeni still believes that the savings rate will surge in the years ahead but acknowledges that “we have to get through this current weakness first.” He expects that it may now take an additional two years for the rate to reach 10%.

Forecasters at DRI-McGraw Hill in Lexington, Mass., have also trimmed their savings rate predictions because of the recession, though they share the consensus view that the downturn will be brief and mild.

Cynthia Latta, senior financial economist at the firm, said DRI has predicted that the savings rate will fluctuate between 4% and 4.5% the next two years. Earlier this year, before the recession took shape, the firm was predicting that the rate would vary between 4.5% and 5% in 1991 and 1992.

Other economists are less optimistic.

Lacy Hunt, chief U.S. economist with Hong Kong Bank Group, believes that two factors are now depressing the savings rate.

One is the way price growth is outstriping wage growth, forcing U.S. workers to spend a larger share of their income to maintain their living standards. Wages are rising at 3.4% annually, while prices are rising at 6.7%, Hunt says.

The big U.S. excise and income tax increases will also cut into personal income this year, Hunt says.

Of course, as the recession puts many workers out of work and frightens others, it will persuade many Americans to increase savings, Hunt says. Yet, “on balance, the rate will be lower,” he says. “Next year, it’s going to average 3%, and there’s no real prospect of rebuilding it.”

Some economists also wonder about the strength of Yardeni’s demographic argument.

Paul Getman, economist with Regional Financial Associates in West Chester, Pa., notes that Yardeni’s argument assumes that baby boomers will begin to behave as their parents did, adopting more frugal attitudes as they age.

“But will they? There have been so many technological and cultural changes during this generation,” he says. “Can you be sure that people who have been raised with the credit cards and buy-it-now attitudes will actually start to change their behavior?”

In his view, it might take a punishing recession to persuade the generation that it needs to change its spending habits.

Sandra Shaber, an economist with Futures Group, a management consulting firm in Washington, says the aging of the baby boom generation doesn’t necessarily mean that the group’s financial burdens will decline in the 1990s. After all, she notes, many have delayed child-bearing--and thus tuition and other burdensome expenses that are still ahead of them.

Because of rising home prices, many also have not been able to buy the kind of house they have dreamed of, and thus may still be planning to spend money to “trade up.”

“I don’t think you can take Yardeni’s reasoning for granted,” Shaber said.