Young Adults Face Headwinds But Remain Hopeful

Today’s young adults face numerous financial headwinds that are having a profound impact on their standard of living. This post examines these headwinds in more depth and discusses their implications for young adults and credit unions. 

Declining Incomes

According to the Federal Reserve’s Survey of Consumer Finances (SCF), the average value of real (inflation-adjusted) family income before taxes for young adults (< 35 years old) declined 12% (from $54,200 to $47,700) between 2007 and 2010 (see below graph).  Per this same Fed study, one-half of all young adults had family income before taxes of $35,100 or less in 2010.

Net Worth Challenges

The Fed’s SCF reports that average real family net worth for young adults  declined 41% (from $111,100 to $65,300) between 2007 and 2010.  This was the largest proportional drop of any age group reported by the Fed.

More striking than these declines are the large numbers of young adults with very low net worth.  One-half of all young adults old have a net worth of $9,300 or less, according to the Fed. Pew Research reports that over one-third (37%) of households headed by someone under 35 years old had no or negative net worth in 2009. 

Debt Burden

Experian reports that Generation Y, defined as all 19 to 29 year olds, carries an average debt of $34,765. While this amount is about one-half the national average of $78,030, a much smaller portion of 19-29 year olds have a mortgage than 30+ year olds. The Experian report does state that student loans, auto loans and bankcard debt comprise a larger share of the 19-29 year olds’ total debt compared to the national average (see below graph).

As we noted in our post “Proposed Legislation May Impact Student Loan Risk”, overall student loan debt outstanding is growing rapidly. At the individual level, the average student loan debt outstanding amounted to $25,250 for 2010 graduates carrying this type of debt, according to The Project on Student Loan Debt. This amount represents an increase of 5% over 2009 and is consistent with increases “over the past few years”.

Implications for Young Adults

These financial headwinds have had a dramatic impact on young adults’ everyday lives.  According the Census Bureau, over one out of three (37%) of 18-29 year olds live with their parents.  Pew Research reports that 24% of 18-34 year olds have moved back in with their parents as a result of economic conditions.  Per this same report, 20% of 18-34 year olds have postponed getting married and slightly more (22%) have postponed having a baby.

Despite these headwinds, most young adults (18-34 year olds) remain optimistic about the future, according to Pew Research.  Over one-half (57%) say they do not have enough money now, but expect to have enough in the future to lead the kind of life they want.  Almost one-third (31%) say they do earn or have enough money now. 

This may not be a simple case of youthful optimism. Young adults are set to inherit a significant amount of wealth from their parents’ generation. Estimates for the size of this future inheritance vary widely due to different assumptions regarding taxes, interest rates, etc.  Nonetheless, those young adults that will eventually inherit wealth will need advice and guidance on how best to manage these assets. 

Implications for Credit Unions

Credit unions can play a significant role in helping young adults meet their goals. Credit unions already offer many of the financial products young adults need: Mortgages, auto loans, debit/credit cards, loan consolidations, bill-pay etc.  By following the cooperative principle of providing member education and training, credit unions can make a real impact on young adults’ well-being. Credit unions that provide today’s young adults with advice on managing debt and building savings are building a foundation of customer loyalty that may help them become their financial advisor once they inherit their parents’ wealth and/or build their own net worth.

How Low Can It Go?

These are historic times as interest rates have fallen to never-before-seen levels. Last Friday, 10 year Treasury yields fell below the previous record low which occurred immediately following World War II (click to see graph).

The decline in yields is being driven in large part by a global “flight to safety”. This movement to safe assets can be seen in the following charts showing 10-year government bond yields for the U.S. and select Eurozone countries. Given the headwinds faced by the global economy (sovereign / household debt overhangs, slowing emerging market economies, etc.) and the potential for a Eurozone collapse, investors have become keenly focused on capital preservation. As a result, they are willing to accept record low yields for government bonds of perceived “safe haven” countries, such as Germany or the U.S.

10- Year Government Bond Yields  

While the Fed’s quantitative easing / Operation Twist policies might have also played a role in lowering yields, leading economists, such as Vince Reinhart (sign-in required), have presented strong arguments to the contrary.

While there is no consensus on when conditions in the debt markets might favor an increase in yields, historical experience shows that change, when it does come, can occur relatively quickly. The following graph of 10 year Treasury yields over the past 50 years identifies 10 different periods (denoted by numbers / light-green lines) when yields climbed approximately 200+ basis points from trough to peak. As the table below the graph shows, six out of ten of these increases took less than 18 months from trough to peak.

This is an unprecedented time in terms of domestic and global interest rates. The real question is what are the implications for prices, unemployment and economic growth? Below are links to several interesting perspectives from leading economic pundits (Warning – Caffeine may be required!):

• Bill Gross / PIMCO – Wall Street Food Chain
• Martin Wolf / Financial Times - What is the real rate of interest telling us? 
• John Mauldin - First Deflation, Then Inflation. But the Timing…?