As Gen Z joins Gen Y in the workforce, the two cohorts could deliver a sizable jolt to U.S. GDP, consumption, wages, and housing—and put the U.S. well ahead of its G10 peers.
It’s well-known that Generation Y, often called the Millennials, will overtake Baby Boomers as the largest cohort in the U.S. this year. Less discussed, but arguably more important: Gen Z, born between 1997 and 2012, will overtake Gen Y as the country's largest cohort by 2034, ultimately peaking at 78 million.
As Gens Y and Z combine in the workforce, these two outsized generations could power higher consumption, wages and housing demand, all pillars of GDP growth.
For the U.S. economy, the demographic tailwinds created by these high-population cohorts could be significant, delivering the kind of “youth jolt” that the Baby Boomers were famous for. However, according to a recent report from Morgan Stanley Research, the implications of these demographic shifts aren’t baked into current Congressional Budget Office forecasts, in particular, the projections for labor-force growth.
Work by the firm’s economic team, along with an in-depth survey of Generation Y and Z consumers, uncovered a significantly brighter outlook for the U.S. in the coming decades than previously thought. As Gens Y and Z combine in the workforce, these two outsized generations could power higher consumption, wages and housing demand, all pillars of GDP growth.
In addition, these new projections on labor-force growth could also mean a rosier outlook for Social Security and Medicare solvency, offering investors an overall bullish view for the U.S. between the 2020s and 2040s—and policymakers a different perspective on the road ahead.
As a nation’s labor force grows, productivity, income and consumer spending often increase as well, creating a virtuous cycle of growth. The Baby Boomers are an apt example, propelling post-WWII economic activity for decades as they moved en masse into their prime working and earning years. Conversely, aging Boomers have also dragged on the economy, as structurally lower productivity and slow growth in the potential labor force held down GDP growth.
Those headwinds could be poised for change. Gen Y—born between 1981 and 1996—is now fully loaded into the labor force, even as Gen Z's leading edge now graduates from college and enters the workforce.
This new generational overlap in the workplace could create significant synergies. “Powered by the economic machine of Gens Y and Z, the prime working-age population is projected to accelerate into the 2030s," says Morgan Stanley Chief U.S. Economist Ellen Zentner. “Younger Millennials will continue to reach their prime working years through 2021, and Gen Z will reach their prime working years from 2022 to the second half of the 2030s.”
Zentner and her team recently began analyzing the potential effects of these demographic trends on labor-force growth. To confirm the plausibility of the projections from the Congressional Budget Office (CBO), the team constructed forecasts of potential labor-force growth based on Census population estimates and CBO projections of the growth rate of workers who will eventually be covered by Social Security.
The CBO figures projected labor-force growth to be between 0.3% and 0.5% per annum over the next 10 years. Morgan Stanley's projections were similar to CBO forecasts through 2024; however, Zentner and her team found that labor-force growth in the mid- to late-2020s and beyond could exceed the official CBO estimates.
“The CBO projections understate potential labor-force growth by 0.2 to 0.3% per year in the 15 years through 2040. We concluded that the CBO forecasts could be underestimating the level of potential GDP in 2040 by as much as 2.4% to 4.3%,” says Zentner.
Potential Labor Force Growth May Start Trending Up in the 2020s
Morgan Stanley Research’s labor-force trend lines also support consumption growth into the 2030s that could mirror those last seen during the peak working years of the Baby Boomers—albeit on a smaller scale. “We project trend consumption growth moves up steadily to average 2.5% in the 2030s, driven by Millennials, and then Gen Z, moving through their prime working years,” says Zentner.
Demographics Say Trend Consumption Growth Could
Step Up to a 2.5% Average Pace in the 2030s
To dig further into these findings and the potential impact on the U.S. economy, the economics team commissioned a proprietary survey from AlphaWise—Morgan Stanley's evidence-based research group—to examine the habits, views, and expectations of Gen Z and Millennials.
The results of that survey, in conjunction with the overarching demographic trends, paint a promising picture for the coming decades. The AlphaWise survey found a number of factors that support a “youth boom” beginning in the mid-2020s.
For starters, Gen Z enters the workforce on firmer financial footing than Millennials, with a stronger job market and college costs that are less burdensome. In addition, Gen Z’s aspirations seem to align with the labor market’s opportunities. This cohort sees technology and health care as the most desirable industries to work in, and, in fact, both sectors are expected to be growth drivers for jobs in the coming decades. No surprise, the survey also found Gen Z to be far more tech-savvy than its predecessors, with 60% saying they have used a smartphone before the age of 14.
It also found no generational divide between Millennials and Gen Z, with both groups sharing broadly similar views on education and values. “We interpret this positively as it implies that, alongside the continuous support to population growth, there will be no fundamental generational gap as Millennials relinquish their dominance to Gen Z," says Zentner. “Generation gaps can create misconceptions, particularly in the workplace, which can weigh on productivity."
The U.S. is also projected to be a strong performer when compared with other G10 countries. Specifically, the working-age population in the U.S. is set to expand, even amid expected contractions, on average, across the rest of the G10.
Gen Z Population of G10 Countries
(Percent of Total)
The report also notes that these demographic changes may have positive implications for the U.S. dollar and equities markets. In the medium term, Boomer-driven headwinds suggest a bear case for the dollar. However, in the long-term, “once U.S. population growth starts to improve in the late 2020s and outperforms the population growth of its trading partners, the growth differential widens, suggesting a longer-term bullish outlook for the U.S. dollar," says David Adams, Head of North America G10 Foreign Currency Strategy.
Likewise, the demographic changes support Morgan Stanley's secular bull-market thesis in U.S. equities. Higher labor-force productivity could deliver a tailwind to sales growth, pushing up its GDP growth rate and bolstering long-term corporate earnings.
Finally, Gens Y and Z could positively impact social-safety-net programs in the U.S. Faster growth in the pool of workers covered by Social Security and Medicare should help support the programs' sustainability.
The Social Security Trustees' Report for 2018 forecasts an increase in covered workers of only 5.3% from 2025 to 2040, considerably more pessimistic than what's implied by Morgan Stanley’s forecast of potential labor-force growth. Higher growth in covered workers, in line with projections, would push back the estimated date when Social Security (absent any changes to its current plan) may become insolvent—perhaps by decades—and likely delay the date of depletion for Medicare funds as well.