Demographics – The Ultimate Forecasting Tool: It’s not Just for Marketing Anymore
Since the 1970s increasingly sophisticated marketing database models have emerged for targeting finer segments of consumers by age, income and lifestyles all the way down to zip codes and neighborhood blocks. Demographics have become the “holy grail” for marketers and advertisers. The truth is there is a more powerful application for demographics in economics, business planning and strategy than most people are aware of. A broader understanding of demographics can help us predict what new generations of consumers will do as they age. The life insurance industry was the first to use demographic data for actuarial predictions, computing when the average person will die in order to better assess risk when creating life insurance policies. They understood that demographics are destiny.
Demographics can similarly help economists, businesses, municipalities and consumers see the key trends that will affect their future decades in advance. Why? People do many predictable things as they age that impact our economy, business and product trends. The same information technologies and demographic statistics collected by government agencies and marketing research allow us to document the consumer life cycle from cradle to grave. This life cycle impacts everything from the demand for potato chips and real estate to inflation rates, cycles of innovation, economic growth, immigration rates, and domestic migration -- locally, nationally and globally.
The accompanying chart illustrates births in the US, adjusted to account for immigration. The dramatic peaks and valleys show the extreme nature of generation cycles during the past century, especially the massive size of the baby boom. New generations come about every 40 years, creating waves of boom and bust in different product areas and in the economy as a whole.
Chart: Generation Cycles -- Immigration-Adjusted Birth Index
The first stage of the consumer life cycle is childhood and adolescence. This is when parents and government make an investment in the consumers and workers of the future at great expense, paying to raise them and educate them. Then these young people enter the workforce at age 20.5 on average today, with additional investment and expense to businesses to provide them with workspace, technologies/equipment, training, and of course a paycheck. When the largest numbers of young people are entering the work force, inflation pressures for the economy are at their peak due to these costs and investments. Innovation also thrives, on a slight lag, as newly educated young people enter the workforce with new ideas and viewpoints.
The next stage is family formation, or marriage, at age 26 on average and that stimulates the need for apartments and new retail stores for these new households’ accelerating spending cycle. Children soon follow, and after that will come the first home around age 31. Then it is on to the next home, more furnishings and cars, etc. Trade-up home buying and mortgage debt peak between age 37 and 42. Consumers continue to furnish their homes and spend more on durable goods into the overall peak in earning and spending between age 46 and 50, or age 48 on average.
After age 50 the average household spends less for the rest of their lives, allowing growth in savings and investment. The peak rate of investment occurs around age 54, as does leisure travel. Investment continues into retirement around age 63 and net worth peaks just after that around age 64. Many aspects of health care spending, like pharmaceuticals, continue to grow until the average age of death, currently 78.
Given that we now have highly quantifiable data on all of the key things we do as we age, the economy and many business trends are largely predictable decades into the future – locally, nationally and globally!
