Following last week's news that household formation jumped and was revised higher, the logical consequence is that young Americans living in their parents' basement must finally be moving out.
They are not.
In fact, as the chart below from Goldman shows, Millennials are doing anything but moving out, a development that has left Goldman's economists stumped.
Below is a chart showing that the share of young people (18-34) living with parents has held steady over the last half year, and close to the highest since the financial crisis.
[7]
This is how Goldman frames its confusion:
"The share of young people living with their parents--which rose sharply during the recession and its aftermath--finally began to decline in 2014. But over the last six months, this decline seems to have stalled."
But the economy is recovering, jobs are plenty, credit is available to all. How can this be???
Unless... it is all baseless propaganda meant simply to inspire confidence in rigged data.
Unpossible, right? Well, even Goldman is no longer so sure:
We find that the share of young people living with their parents has increased relative to pre-recession rates for all labor force status groups, not just the unemployed and underemployed. Overall, above-average youth underemployment rates alone account for about one-third of the increase in the share of young people living with their parents, and lagged effects of the recession probably account for a bit more.
Goldman tries to explain this counterintuitive... assuming the "intuitive" is that the economy is recovering.
To what extent do current labor market conditions explain the elevated rate of young people living with their parents? To answer this question, we use the CPS micro data to calculate the share of 18-34 year olds living with their parents by labor market status (employed, voluntary part-time, involuntary part-time, unemployed, and not in the labor force). Because the data are noisy and not seasonally adjusted, we use the 12-month average ending June 2015 and then compare with the 2007 average. Our first finding, shown [below] is that the percentage living with parents is higher across all labor force status classifications. Even among the employed, the share of young people living with their parents remains about 2pp higher than in 2007.
The Share of Young People Living with Parents Has Risen for All Labor Force Status Groups
[8]
And then another nail in the "economy is recovering" coffin:
What accounts for the rest? Part of the explanation is likely that the legacy of the recession wears off only gradually, and looking at current employment status therefore understates the degree to which this is ultimately a labor market problem. Indeed, using a panel of state-level data constructed from the CPS, we find that the effect of unemployment shocks on the share of young people living with their parents dissipates slowly. Why might this be? While moving into a rental unit usually presents a lower hurdle than becoming a homeowner, young people who now have jobs but struggled in recent years might not have enough savings to cover an initial deposit or might fall short of landlords' expectations for a potential tenant's credit score, savings, or income history.
Three other factors might also have played a role. First, researchers at the New York Fed and the Fed Board have found evidence that rising student debt and poor credit scores have contributed to the elevated share of young people living with their parents. Second, the median age at first marriage has increased at a faster than usual rate since 2007 (1.8 years for men and 1.4 years for women). While economic conditions might have played a role, we have found evidence that marriage rates are an important determinant of headship rates. Third, as Exhibit 4 shows, rent-to-income ratios are at historic highs, especially for young people. The future trajectory of these three factors is less clear, suggesting that the share of 18-34 year-olds living at home might not fully return to pre-recession rates.
Rent-to-Income Ratios Are Quite High, Especially for Young People
[9]
It's not just Goldman that can't wrap its head around this most fundamental refutation that contrary to the propaganda, there is no recovery for the biggest, and most important, US generation currently alive. Here is more from USA Today [10]:
Despite continued signs of economic recovery, a growing number of Millennials are moving back in with Mom and Dad.
The percentage of Millennials living with their parents increased from 24% in 2010 to 26% in the first third of 2015, according to a Pew Research Center report, which is based on Census data. The study, which was released last week, compared figures to 2010 because it was the beginning of the economic recovery and one of the worst years for the labor market, said Richard Fry, senior economist at Pew. This is despite a lower unemployment rate. In 2010, that rate was 12.4%; it has fallen to 7.7% so far in 2015, according to Pew.
Roughly the same number of Millennials — 25 million — head their own households today since before the recession in 2007, said the report.
The data are bad news for the housing industry, which is looking for a boost from young, first-time buyers.
"The pattern of household formation has become unglued from the job market," Fry says. "This is concerning because ... there’s a lot of spending that goes with setting up households. Young adults are not establishing more households, and that's proving to be one of the drags on the housing recovery and the larger economy."
To summarize: a terrible labor market for the young generation as a result of "sticky" elderly workers who can't fall back on interest from their savings thanks to the Fed's ZIRP policy and are thus unable to retire clearing the labor market for the nextt generation, an unprecedented student debt load, and soaring rents which Millennial incomes simply can not cover.
And that is why the economy is far worse than anyone in the mainstream media will admit.
But wait, because here comes the paradoxical punchline: as more and more Millennials are stuck in the basement for whatever reason, and refuse to be a part of the labor force, the immediate implication is that due to their inertness, and unwillingness to even try to get a job, the US labor force participation rate is crashing and artificially low as millions of young Americans remain either in their parents' basement or in college (with the benefit of a very generous student loan from Uncle Sam). The result - a chart which looks eerily comparable to the one up top, showing the number of Millennials living with their parents: the US labor force participation rate inverted.
[11]
Why is this a paradox?
Because as the participation rate declines, so does the unemployment rate (thanks to a record 94 million Americans not in the labor force). In fact, the worse the US economy is for tens of millions of millennials, the lower the broader unemployment rate drops, sending a false signal to the Fed and economists that the economy is actually stronger!
And the supreme irony: the worse the economy, and the lower the unemployment rate, the closer the Fed is to hiking rates. In fact, as Lockhart hinted today, the Fed may well hike rates in just one month due to one massive misinterpretation of what is really going on in an economy in which a record number of people choosing not to look for work, but to continue playing Xbox in their parents' basement... right next to their bed.
No wonder Goldman is confused. As for the Fed hiking right into what is by implication an economy that is grinding to a halt if not already in recession, well... just read our notes on what happened when the very same Fed woke up the "Ghost of 1937 [12]" in an almost identical scenario.
The outcomes, one of which was the second World War, were anything but pleasant...
