One of the more enduring traits of the last recession is the number of children who have either never left home, or who did leave home but returned. According to the Pew Research Center, the number of children age 18-31 living at home has now exceeded 32.1 percent of the population. This is more than the number of people of this age range married or together in their own household (31.6 percent) and people living alone or as a single parent (14 percent). The balance of the universe consists of people who are living in school, prison, with grandparents, or in a group home (22 percent).
The number of children in this age range living at home is the highest since 1940, when people lived at home due to the Great Depression. There are several reasons for this, including delaying or foregoing marriage, student debt, lower rates of employment for this age group, rising college enrollment, and higher down payment requirements on first homes.
The economic impact of this trend is to make demand for new homes more drawn out than previously. In earlier economic recoveries, the spur of home construction and automobiles drove the economy higher, to where it also got a boost from capital spending and higher wages. In this recovery, autos have performed according to script, almost doubling in volume since the economic crisis in 2008-2009. New home construction has been more muted. This, along with the absence of any fiscal policies designed to spur demand, has made the economic recovery more subdued than previously, as well as keeping wage gains absent. In fact, since 2000, average wages have declined in terms of what they can buy.
There are signs that some of these trends are being reversed. The job market has taken on a firmer tone, if only from the number of people retiring. This should put pressure on wages to be increased at some point. The lack of immigration reform has resulted in fewer foreign workers in this country, whether their skills are needed or not.
Economic instability has affected the desire to raise a family, when the future is less well defined. However, with so many people living at home, saving their money in the process, the ability to put a down payment on a home has increased for many first- time homebuyers.
All these trends point to a housing recovery that will be less steep but perhaps more enduring than previous recoveries. The country’s overall population continues to shift south and west, from the northeast and midwest. This creates localized demand, even as there may be a housing surplus elsewhere. The fact that a house in, say, Akron, Ohio costs half or less as much as a similar home in Nashville, Tennessee is hardly relevant if there is population and job growth in Nashville, but neither in Akron.
For housing to show more robust growth there will need to be a stronger growth in population. As existing people are not having sufficient children to sustain the population, the only way to attain more adults is through immigration reform.
Japan is an excellent case study of the need for immigration in an advanced society. As the Japanese population continues to age and contract, restrictions on immigration keep the country from putting together two consecutive years of economic growth. As consumers age, their buying habits become more minimal and conservative, depriving the country of private sector growth. The Japanese stock market, which peaked in 1983, lost two-thirds of its value shortly thereafter. It is now back to 60 percent of its high. Only firms that produce for export show any vibrancy.
For now, the housing recovery continues to support an expansion that many say is too slow and fragile, but at the same time refuses to die off and revert back to a recession. Given the political leadership in the country, this is the best we can expect. There is no appetite to support government infrastructure spending, job training, or any other program which would generate to some extent, a larger deficit but more and better paying jobs in the process. Nor is there any political will to take on immigration reform, in a way that would make the country better off. Given all of this, the economy is doing pretty well.
Economic activity continues its measured pace. Consumer spending is distorted by the warm winter and cool spring, and the corresponding effect that this has had on apparel sales. Retailers are feeling the heat not just from the internet channel, but also from a shift from consumers buying goods to services. Leisure travel has been very strong, along with health care and restaurants. Goods such as furniture and home goods seem to struggle to find growth.
While the upturn in housing will help consumer durables to some extent, there seems to be a resistance by consumers to discard goods just to buy the latest version. The stalling of Apple iPhone sales is but the latest case study of this.
Inflation continues to plot its return. As we are now lapping this time last year when energy prices began their descent, expect to soon see a more normal inflation rate of 2-3 percent. This will not so much be an increase in inflation as an unveiling of it. The collapse in the price of oil kept much inflation out of the public eye for the past year. As energy prices stabilize, other sources of inflation such as health care and services will become more manifest. Should the economy reach full employment before the end of the year, inflation will be revised upwards yet again.
Inflation is not one of the Federal Reserve’s favorite topics. Its effect is to force the Fed into raising interest rates, in order to assure that borrowing to buy things does not become cheaper than holding money.
Thus while the Fed has not yet connected the dots on their next rate hike, the inflation activity would suggest another rate increase in June, with several more to follow.
Gold took this revelation very hard, staging a $100/oz. one week decline. Higher interest rates are not the friend of speculators of any stripe. Private equity funds take note.
The Stock Market
Stocks are showing firmness not associated with this time of year. The market has reversed leadership since January, with more traditional value stocks doing better than 2015, while some of the growth names have faded a bit.
Overall market data is distorted by the collapse of the energy industry. Things like market P/E ratios, etc. becomes less relevant when profits in the energy sector, about a fifth of the market in January, falls 96 percent. Still, while not all firms will be able to survive on $40-$50 per barrel oil, enough will to rebuild the sector going forward.
Other sectors have similar stories to tell. Excess airline capacity will be taken care of when fuel prices rise, scrapping some of the planes that would have been retired had fuel prices not declined.
All of which reminds us that this is a market of stocks, and not a stock market.
Warren M. Barnett, CFA May 31, 2016