Rising healthcare costs are expected to impact consumer spending.

Struggling brands and retailers who are betting on Millennials and Generation Z as a panacea for sluggish sales may want to rethink their approach. A recent report from Morgan Stanley said the spending of these generational cohorts “will accelerate over the next 10 years, but is likely not enough to offset the continued headwind from an aging population and rising health-care costs in the near term.”

As a result, the research analysts urged investors to be “selective” with the funds. They also expect a deceleration in apparel spending over the next decade.

Still, the combined spending power of Generations Z and Y is massive. Morgan Stanley researchers said that, over the next decade, “the 73 million Millennials [Generation Y] will overtake in number the Baby Boomers — who decline to 72 million.”

“But in 2034, Gen Z, born between 1997 and 2012, which make up nearly 20 percent of the U.S. population, will become the biggest U.S. cohort, eventually peaking at 78 million,” authors of the report noted. “Total consumption growth, the largest component of GDP, should accelerate from here as Millennials and Gen Z age into their prime working and spending years and Baby Boomers become a smaller percentage of the working population.”

The issue, though, with long-term discretionary spending, is the impact of an aging population. The analysts at Morgan Stanley said “total consumption growth reflects benefits from accelerating government spending on medical and other benefits as the population ages, while our discretionary spending outlook focuses solely on dollars coming out of consumers’ wallets, or PCE.” The researchers said their forecast is based on the next 10 years. “Thus, we forecast a slightly less optimistic discretionary spending outlook as Gen Y/Z growth appears unlikely to offset decelerating consumer spending over the medium-term, driven by an aging population.”

“This makes it critical to identify which subsectors should benefit from accelerating Gen Z/Gen Y spend,” authors of the report said adding that home improvement, lodging, auto maintenance and “food at home” are “relatively better positioned” under this outlook. Segments that might experience headwinds in the medium-term include apparel, home furnishings, and “food away from home.”

“Apparel is likely the category most negatively impacted by an aging population as we estimate a minus 164 basis point headwind to apparel spend over the next 10 years, driven principally by a negative 180 bps headwind from a larger 65-plus cohort who on average spend 39 percent less on apparel than the population average,” the researchers said. “Thus, we advocate owning apparel and footwear companies levered to key Millennial and Gen Z secular themes such as athleticwear, value, strong mobile experiences and high Hispanic exposure.”

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