Washington, DC — Facing faint job prospects and mounting student loans, Courtney Schlottman did what many others her age have done, and moved back in with a parent. She became one more data point contributing to the nation’s stunted rate of household formation.
That’s a fancy way to describe the rate at which grown children leave the nest or depart the world of roommates for their own places. Derived from Census Bureau data, it’s an important economic indicator because, when normal, it portends a healthy housing sector, which in turn bodes well for the wider economy.
Statistics aren’t high on the list of worries for Schlottman, 23, a would-be educator who graduated from Bloomsburg University last year. She’s moved back in with her father in Reading, Pa., while riding out an underperforming economic recovery.
“In order for me to be financially stable, I have to live with my father,” she said. “I’m hoping it’s not much longer, maybe a year or two. But going to interviews and not hearing anything back, it’s not promising. My hope is one or two years from now I can get a full-time job.”
Since 1965, the number of households has grown at a rate of 1.5 percent annually, according to census data, and that’s meant about 1.3 million new ones every year. But since the Great Recession began in December 2007, and going well beyond its end in June 2009, the rate of new households has slowed sharply.
“The number of households, via quarterly Census Bureau data, (suggests) we’re only adding about 600,000 to 700,000 this year,” said David Crowe, the chief economist for the National Association of Home Builders.
Schlottman personifies why economists worry about the flagging household-formation rate. Unable to find full-time work, she’s underemployed, working as a college-educated teacher’s aide and forced to live at home in order to pay off student loans.
Multiply her plight across the economy, and there’s a huge ripple effect.
“While younger adults . . . make up a relatively small proportion of heads of households, they account for almost three-quarters of the overall shortfall in household formation,” Timothy Dunne, who was then a vice president at the Federal Reserve Bank of Cleveland, said in an August 2012 report, citing numbers that haven’t improved much.
Workers aged 20 to 34 are vital to foot traffic in shopping malls, sales at automobile dealerships and the pace of new homes being built. For all that to happen, however, there must be more jobs for them.
“How do you get household formation moving? It means getting the economy moving faster, more jobs,” said Jack Kleinhenz, the chief economist for the National Retail Federation.
Retailers feel the lagging rate of household formation in slower sales, particularly home furnishings and other products tied to the housing sector. Little by little things are getting better, but a full recovery remains elusive.
“The outlook certainly is improving, but it’s going to take a long time for this to actually get some traction,” Kleinhenz said, adding that household formation is one of the signposts for recovery that he’s watching.
A McClatchy analysis of data from the Bureau of Labor Statistics underscores this point. The unemployment rate in October stood at 14.4 percent for workers aged 16 to 24. It peaked at 20 percent – or 1 in 5 – in June 2010, after being as low as 9.4 percent in December 2005, during boom times.
For workers aged 20 to 24 the unemployment rate in October was 11.8 percent, down from a peak of 17.1 percent in January 2010. For workers 25 to 34, who should be well on their career paths, the jobless rate was 7 percent in October, slightly better than the national average and improved from the peak of 11 percent in January 2010 but still well above the 4.2 percent rate in December 2006.
The stress in the labor market for younger workers disrupts a number of historical patterns in consumption.
For example, in normal times a college graduate gets a job and then an apartment. That’s generally followed by the purchase of a first home, and the seller of that home is often a first-time buyer for homebuilders. “The majority of new homes are sold to repeat buyers. So the slowdown in household formation has the implication that the first-time homebuyer . . . is being delayed,” said Crowe, the homebuilders economist. It’s why the growth in new-home starts is largely flat despite a growing population.
The national 7.3 percent unemployment rate remains high by historical standards, even more so for teenage workers and younger ones like Schlottman, who’s fresh out of college.
And it’s these workers aged 20 to 34 who appear to be most missing in the rates of household formation, and in auto sales.
From 2007 to 2011, the share of car buyers aged 18 to 34 fell by almost 30 percent, Lacey Plache, the chief economist for researcher Edmunds.com, said in a Nov. 1 analysis. This age group, dubbed millennials, helped fuel a surge in auto purchases last year that sparked hopes of recovery, which proved short-lived.
“Labor market progress slowed for this group in 2013, though. Through August, the older millennials gained just 4,000 jobs per month on average and their unemployment rate rose to 7.8 percent, even as their labor force participation declined slightly,” Plache wrote, concluding that the slowdown in hiring “weakened their share of auto purchases.”
The pain in this group is also felt in Census Bureau data on households. People younger than 35 headed 23.5 percent of all households in 2000 but 21.7 percent last year. Similarly, households in which someone under 35 owned the home were 9.56 percent of all households but that declined to 7.9 percent by last year.
Those are drops of 1.8 and 1.6 percentage points, respectively, in measurements that tend to vary only by tenths of a percentage point. Such a decline speaks to how this age group is the slowest to see a return to normal after the Great Recession.
“We’re just not creating the need for new houses that we had in the past,” said Dan Meckstroth, the chief economist for the Manufacturers Alliance for Productivity and Innovation, a trade association.
While manufacturing itself is rebounding, the growth is slow, in part because of the same trend of financially impaired younger workers who aren’t forming households.“It’s getting back. It’s recovering,” he said.