One of our readers passed on an article of note: “Fewer New Households Formed in Recession.”

The headline caught our eye, because with the huge number of Echo Boomers graduating from high school and college the number of new households being formed should be exploding.  It appears, however, that the recession has kept quite a few nests from getting empty.  As the Washington Post writes,

The recession has wreaked havoc on all sorts of life plans. Tumbling stock prices have cut retirements short. Layoffs have forced middle-aged children to move in with mom. Falling home prices prompt unhappy couples to rethink divorce. The larger consequence of all these discrete decisions is that Americans are forming fewer households, which in turn helps prolong the downturn….

Demographers and housing experts attribute the drop in household formations to millions of individual decisions to forgo immigrating to the United States, to put off a move, or to bunk with friends and family for a while.

The highlighted sentence summarizes HS Dent’s research methodology.  What we think of as “the economy” is nothing more than the sum of millions of Americans going about their business, buying and selling.   During recessions, EVERYONE does not simultaneously stop spending money.  But at the margin, one person forgoes a Starbucks coffee here, another forgoes a new car stereo there…and in aggregate, we buy less, businesses invest less, and the economy shrinks.  And sometimes, it shrinks by quite a lot.

In the article, we see that the number of new households — defined as a group of people sharing living arrangements — grew by 772,000 in the year ended March 31, compared with an increase of 1.63 million a year earlier.  That is an incredible 53% drop!  And this, as we said earlier, was in a year in which million of young adults graduated from high school and college!

With immigration all but grinding to a halt, we have lost one major contributor to household formation that is not likely to return any time soon.   But, we still have the Echo Boomers, who can’t continue living with mommy forever.   Recession or not, most of these teenagers and 20-somethings will set out on their own in the years to come, and when they do, they will mop up a fair amount of the excess housing supply.  They won’t be buying McMansions, of course.  But they will be buying starter homes and renting entry-level apartments.  Perhaps some will live with roommates for a few years, and there will be a few that continue to live with family.  But given the size of this generation — the largest since the original Boomers — there will be enough of them to populate many of the apartments and houses we see vacant today.  

The controversial housing report released last month by Harvard University calculates that the glut of 1.5 million surplus homes from the boom years would have already been soaked up if household formation rates had remained at normal levels.  This fails to consider price, of course, and in many areas home prices would need to continue falling for them to be affordable for these young would-be buyers.

The sooner the household formation rate increases, the better.   Because in the meantime, we still have a housing glut and a massive amount of oversupply throughout the economy. For our economy to recover, we need the Echo Boomers to get off of Mom’s couch…and buy their own…preferably on credit.

Charles Sizemore, CFA

Co-author of the recently-published Boom or Bust: Understanding and Profiting from a Changing Consumer Economy

We came across an interesting article late yesterday: “What will signal that consumers are back? Check the spa.”

The Associated Press writes,

What used to be an afterthought, from ordering wine with dinner to jetting off on a resort vacation, still feels like a splurge. No one knows when consumers will feel financially secure enough to return to old spending patterns. But those whose livelihoods depend on it — shop owners, restaurant managers, hotel staff — will be among the first to see the shift.

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As we’ve discussed in prior posts, the states are broke.  Their budget deficits are at crisis levels, and long-term pension and health liabilities make many of them technically bankrupt.  With traditional sources of revenue—such as income and property taxes—drying up, it’s not surprising at all to see the states looking a different direction:

“States Give Gambling a Closer Look” Read the rest of this entry »

Consumers are cutting back, and this is certainly not news to anyone.  The retail sales statistics prove it, as does casual observation of any American shopping mall.  This is bad news for American retailers.  Interestingly though, not all retailers are suffering.  

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John Steele Gordon is a renown and surprisingly entertaining economic historian.  As we write this blog post, his Empire of Wealth , The Epic History of American Economic Power sits prominently on the bookshelf behind us.   Mr. Gordon regularly writes for both Barron’s and the Wall Street Journal, and we found his essay in today’s Journal, “A Short History of the National Debt,” to be well worth the read.

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Barron’s is perhaps the widest read financial weekly, and with good reason.  It’s a fine paper, generally full of hard analysis and cogent commentary.  If we ever had a complaint about Barron’s in the past, it might be that the paper never seemed to “get” demographics, which is why we were excited to see Kopin Tam’s column in this week’s edition.  Tam writes,

The traditional playbook for betting on economic recovery calls for a shift into consumer discretionary and financial stocks, since such “early cyclicals” have historically led markets out of recessions.  But with aging boomers no longer spending freely, the next economic cycle is casting for a new hero.

At this stage, there is no obvious heir apparent waiting in the wings.  

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Warren Buffet must be happy.  Coca-Cola, the crown jewel of his Berkshire Hathaway stock portfolio, reported healthy sales and revenues in the fourth quarter.  Given the absolute evaporation of  demand plaguing the rest of the consumer goods and services sector, this is quite an accomplishment.  The Financial Times reported:

“Coca-Cola sales sparkle despite the downturn”

Deflation has faded as a headline topic over the past month, but it is still alive and well.  This is particularly true in Japan, where deflation has been a nagging concern for the better part of two decades.  Just five months after producer price inflation hit a 27-year high on rising energy and commodity prices, wholesale prices are falling year-over-year.  Consumer prices are also showing weakness.  Stripping out food and energy, Japanese CPI mildly declined in December.  For Japan, this is a scary reminder that the country is still yet to be free of its economic malaise.  Given its shrinking population, domestic consumer demand may never recover.   Read the rest of this entry »

Going through some old papers, we found a cartoon we cut out of the Economist last year:   Need we say more? 

New York Times columnist David Leonhardt recently echoed our own comments on John Maynard Keynes and the Paradox of Thrift.

Tongue in cheek,  Leonhardt writes, “You, the American consumer, spent too much money.  You bought too much house, took on too much debt and generally lived beyond your means.  Your free spending ways helped cause the worst financial crisis since the Great Depression.  And now you’re going to have to do your part to end the crisis.  How?  By spending.” Read the rest of this entry »