Scan our forecasts over recent years, and you can easily find one glaring, repeated error. Our US outlook has consistently foreseen a housing revival, and while we did accurately call the turning point, the levels have not failed to disappoint. That convincing surge, the hallmark of every US recovery, simply hasn’t materialized. Is this just EDC Economics’ version of Linus’ Great Pumpkin, or is this event eventually going to show up?
Where did we go wrong? A key group of US consumers has been missing in action since the Great Recession. Unlike any recent post-recession period, droves of young workers have been sidelined, unable to fully or even partly integrate into the job market. Why should this really matter? After all, they’re not the highest-net-worth consumers in any economy; surely they are not that important to the overall picture, especially given how top-heavy Western economies are with ageing and wealthy baby boomers? Maybe so; but what makes these younger age groups critical is that they are ‘first-wave’ consumers; they are buying their first cars, their first homes, forming households and having their first children, with all the specialized consumption those events entail. Take them out of the economy, and you lose a potent force that affects a whole chain of trans-generational economic activity.
How do we know that they are missing? Check out labour force participation, and it’s immediately apparent that something went horribly wrong. US unemployment spiked with the onset of recession, surging from 5 per cent to 10 per cent between April 2008 and October 2009. But it began a steady recovery almost immediately, and is now back below 5 per cent. Normally, this increase in demand for workers would increase labour force participation. However, this time around, overall participation continued to tumble, and particularly so for younger workers. Take those in the 25-34 age category – they typically have high participation, but in the post-recession period, fully 3 per cent of this entire population slice dropped out of the labour force. That alone is 1.3 million American youth, potential consumers just sitting on the sidelines.
This is obvious in another disturbing statistic. Unable to find meaningful work, adult children are staying at home for longer and in record numbers. Among those 18-34 years of age, the percentage still living at home has been pretty steady over time, regardless of economic conditions. However, this time around, the number shot up to unseen levels: almost one-third of Americans in this age group are still parked at home. Some call this a change in preference, but history strongly suggests that it is directly related to the lack of economic opportunity.
That’s why it is particularly remarkable that, after all these years, this story is doing a big U-turn. Since mid-2015, labour force participation of the 25-34 age group has regained 1.8 percentage points. That’s almost 800,000 extra first-wave consumers that have entered the market in less than a year. Better still, the trend is pointing upward: overall employment growth is still hot, the official unemployment rate is ultra-low, and real wages are ticking up. Conditions seem ripe for continued re-absorption of this important class of workers and consumers.
Is the best of this growth now behind us? If participation rises to pre-recession levels, then there are about another half-million millennials on the way in to the job market. At current absorption rates, that gives the US market less than a year of growth. But with the ageing of the population, who’s to say that that’s where it ends? We could actually see higher-than-average participation for some time, which would mark a radical departure from the gloomy future most have forecast for the young set.
Has the wave of consumption and home-buying begun? Demand is picking up, but the best is yet to come. It will come with a lag: millennials will have to get used to this new money coming in, they’ll be retiring student debt, dealing with housing costs, relocation and the like. But they’ll also have help from ever-wealthier parents, eager to see them progress- finally.
The bottom line?
Parents of America, you are about to get your basement back. And in the process, you are likely to see an economy that finally gains lift on a broader front, a new wave of growth that still has a few years behind it.