Personal consumption is the largest pillar of U.S. GDP, accounting for 70% of the economy.1 Since the 1980s, the Baby Boomer generation—born between 1946 and 1964—has been an enormous engine of that spending.

But as the Boomers pass the torch of “largest generation” to the Millennials, several questions arise:  Will the younger generation provide the same engine for GDP growth that the Boomer generation has? Will they have similar spending patterns? And how should investors position their portfolio to make the most of this transition?

Morgan Stanley Wealth Management recently examined the effect that these outsized generations will have on U.S. GDP and specific sectors in the economy and found several key shifts.

A Challenging Environment

This year, Millennials—born between 1980 and 1996—eclipsed Boomers as America’s largest generation, numbering 83 million.2 However, the two generations came of age in vastly different worlds. Millennials have grown up in the shadow of the Great Recession, are saddled with higher education debt and housing costs, and are forming households later. These factors dramatically affect how Millennials spend.

Educational spending may come to define the Millennials the way owning a house and two-car garage were emblematic of the Boomers. On average, Millennials under 25 spend 4.2% more of their income on education than their parents did.3  Higher costs have meant more student debt which has put a damper on spending.  From 2005 to 2012, the average amount of student debt for Americans under 30 has nearly doubled from $13,340 to $24,897.4

Worse, although Millennials are the most educated generation in history with 61% attending college5, they’ve encountered a more challenging job market.  Millennial employment rates plummeted during the financial crisis and still haven’t fully recovered. In addition, more Boomers have opted to stay in the workforce for longer, which may be squeezing Millennials on the career front.6

Changing Households

Another key differential between Millennials and Boomers: household formation. The oldest Millennials have been marrying later, affecting many related consumer categories such as furniture, appliances and child care.  However, between 2011 and 2015 household formation began trending upward and should accelerate moving forward.

The housing market has also changed. Home prices have increased 250% since 1980 and Millennials under 25 are spending 7.7% more of their wallet on housing than the Boomer generation did at that age.3 As a result, the number of non-married people under 35 sharing a home or apartment has grown.

But despite room sharing, 89% of current Millennials who rent still plan to buy a home, compared with 77% of Generation X.8 As Millennial employment continues to improve and household formations grow, Millennials could fuel new sales in the housing market.

Life Cyclical Spending

Despite these new factors, the younger generation is still subject to the same powerful force as their parents: growing up.

As consumers age, their spending increases, with the U.S. consumer’s peak earnings, spending, and investing years between ages 35 and 55. This increase is most noticeable in housing and insurance, as the next generation settles down and starts families.

In 2016, the first Millennials turn 35 and begin entering this peak spending age. As the rest of the cohort enters their peak spending years, their aggregate spending is expected to increase 25%, driving demand for new homes and financial security. College loans may be swapped for home loans and life insurance as this new generation takes on the responsibility of economic growth.

We note, with a more than a little bit of curiosity, that the last secular bull market in U.S. stocks began in 1982—just when the first baby boomers turned 35.

Still the Spending Driver

The difference this time is that the Millennial’s parents will still be alive to contribute. When Baby Boomers took the reins of growth in the 1980s, only 12% of the population was older than 65. In 2016 that number is 15%, and as the rest of the Millennial cohort ages into peak spending through 2046, the 65+ population is forecast to increase even further to 22%.9 Boomers also control 70% of the nation’s disposable income.10 This is partly driven by accumulated income, but also by longer careers. That means the Boomer generation will still maintain enormous spending muscle. In the next two decades, spending by Americans over 50 is projected to increase by 58%, whereas spending by Americans 25-50 will grow by 24%.11

That said, the oldest Boomers are past their “peak consumption years”, meaning less spending on key categories like transportation, housing and apparel, with the windfall more than picked up by their children, netting out to about an average 0.77% demographic driven annual growth rate across sectors through 2060.12

But perhaps the greatest boom in spending for the Boomer generation will be in health care. As a percentage of total spending, Boomers are expected to spend 3.4% more on health care than their parents did, and through 2060 will contribute to a 1.04% annual growth rate in this sector by sheer number of new customers alone. This is 35% higher than the average demographic dividend across sectors over the same period, and represents possible significant secular outperformance.12

The Bottom Line

Overall, the U.S. population is growing. As Millennials enter their peak consumption years and Baby Boomers live longer, the two groups will provide a double barreled boost to consumption, bringing with them increased U.S. GDP. 13

Within this overall growth, the changing demographic structure is creating important spending shifts. Watch for relative outperformance of Health Care, Housing, and Entertainment, and relative underperformance of Education, Apparel, and Transportation as the country matures.

This article was adapted from the Morgan Stanley Wealth Management Client Conversations report, “Demographic Destiny: Are Millennials Spending Differently Than Baby Boomers?”