Boomerang generation holding back US growth

James Surowiecki of The New Yorker recently looked at the so-called rebound of the US economy. In February this year 200,000 new jobs were created and real incomes were growing also. Other indicators have been positive, for instance new car purchases have increased and the their are signs that aggregate demand is going up. But this demand is not necessarily coming from higher incomes from greater hours worked but the increasing number of young adult Americans living at home – see graph. This means that they have more income to spend on other items rather than rent/mortgage etc. In the article Surowiecki mentions data relating to the number of households.

1947 to 2007 – number of households in the US increased every year,
2008, 2010 and 2011 – number of households dropped even as the population grew.

Demographic Depression

Economist Scott Sumner came up with the expression Demographic Depression which has been a major cause of the weak recovery. The construction of new homes normally contributes greatly to the level of economic activity but when people are doubling up, there’s little demand for owning or renting. This also impact on peripheral items such as white wear items etc. However when doubling up ceases then we can say that there should be an increase in demand for housing, rentals, and white wear items. Research of past recessions shows that when unemployment falls household formation rebounds quite strongly. But global conditions and commodity prices could lead the Fed to tighten monetary policy but this would be going against what their stand of 0% interest rates to 2014.

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