A Lack of Household Formation Participation Trophies

Brad-00447-cmyk by Brad Houle, CFA Executive Vice President

Millennials get a bad rap. They are characterized as the generation that was born between 1980 and 2000 and are often considered to be indulged and coddled. They are often accused of being the by-products of a society where everyone receives a participation trophy. This is quite different than the baby boomer generation, born at the end of World War II through the mid-60s and often considered wealthy, active and the result of an economic boom. And while the millennial birth rate in 1990 matched the 1957 baby boomer birth rate with greater than 4 million births, similarities between the two generations begin and end there.

Following the baby boom of the 1950s, there was a significant pick up in household formations roughly 20 years later. Consumer spending on the acquisition of homes, furniture and other durable goods define household formations, which makes up almost 70 percent of our gross domestic product or, said differently, our national income. This consumer consumption of household formation drives the economy and the millennials cannot keep up the pace. According to Federal Reserve data from 1997 to 2007, about 1.5 million households were formed on average each year in the United States. Then the Great Recession hit, and in the ensuing three years, the rate fell to 500,000 per year.

In addition, the Great Recession resulted in a drop in millennial independent living. The Pew Research Center, in the first third of 2015, found that 67 percent of millennials were living independently, compared with 69 percent of 18-to-34 year olds living apart from family in 2010 and 71 percent in 2007. Also, unemployment in the millennial demographic shot up over 12 percent during the recession. Moving back in with Mom and Dad and/or possibly pursuing further education became a viable option for many in the group.

Today we learned that current unemployment has dropped to around 5 percent. This begs the question: If unemployment has improved, why are millennials still so reluctant to leave the nest? The rising cost of tuition, the student loan debt that results and an increased home down payment are thought to be a few of the culprits of these nest-bound millennials. The College Board, responsible for several standardized college tests such as the SAT, points out that the average “published tuition and fees at public four-year colleges and universities increased by 13 percent in 2015 dollars over the five years from 2010-2011 to 2015-2016, following a 24 percent increase between 2005-2006 and 2010-2011.” As a result, according to the Brookings Institute, the average balance of outstanding student loan debt for households with some debt was $25,700. In addition, following the financial crisis the required down payment on a home was raised to 20 percent. Considering these factors, it is possible this generation is making rational economic choices by living at home as opposed to a desire to have their parents clean their room for them.

Ned Davis Research estimates that there are roughly 3 million incremental millennial households that have yet to be formed. As millennials leave the comfort of their parent's basement, pay off their student debt and join the real world, this household formation could be a tailwind for the housing market as well as the consumer economy.

The employment report for the month of October was released on Friday and was much better than expected. 271,000 jobs were created in October and there was an upward revision to the number of jobs created in the prior month. As mentioned earlier, unemployment dropped to 5 percent and the average hourly earnings was up more than expected rising 2.5 percent on a year-over-year basis. With this stronger-than-expected data the implied probability of a Federal Reserve rate increase is now at 70 percent for the month of December.

Our Takeaways from the Week

  • Employment numbers positive
  • More anticipation of movement with the millennial generation that could be a tailwind for consumer spending