OK, the economy is growing more slowly than we’d like, but why?
I recently pointed out that weak investment is partly to blame, noting that our slow rate of capital investment “explains the almost two-thirds of the decline in U.S. productivity growth.”
But weak investment is not wholly a matter of capital equipment used in production. It’s also about residential investment, i.e., home buying. And here, a new analysis by researchers at Goldman Sachs provides some eye-catching figures that help explain this part of the problem.
The figure above (not from the GS analysis) just shows residential investment as a share of GDP. The housing bubble and bust are evident, but note how slowly this share is climbing back to its historical mean relative to past downturns.
Well, this GS figure helps explain why. It shows the sharp uptick in the share of 18-34 year-olds living “in the basement” of their parents’ homes. The data don’t go back too far but the magnitude of the increase certainly seems unprecedented. The trend appears to have plateaued but it has yet to come down much.
So, next layer of the onion: why this spike in the share of grown kids living at home? Does it have something to do with Peter Pan-ism (“I’ll never grow up…not a penny will I pinch…I will never grow a mustache…or a fraction of an inch…’cause growing up is awfuller than all the awful things that ever were,” etc.)?
That would be interesting, if not disconcerting, but no, I think it’s the economy and student debt. Based on GS estimates and adding in inertia, the tough job market may explain half of the increase in the figure above (and thus, part of the slow trek back to the mean in the first figure up top). By inertia, I mean that once you’re re-ensconced in your old room with the Madonna posters still on the wall, it probably takes more than a tick down in the jobless rate to blast you outta there.
Second, there’s an interesting and important role in these developments for the historically large stock of student debt. The figure below, from a Federal Reserve Bank study, plots the correlation between the increase in student debt among college grads and the increase in “co-residence”—the nice way of saying “kids in the basement.” The fit is moderately solid and their more detailed analysis finds that increased student debt explains as much as a third of the increase in co-residence.
Finally, while high debt levels interacting with tough credit standards may be putting mortgage loans out-of-reach for some of these grown kids, couldn’t they just rent? Well, sure, but this next GS figure shows that not only are rent-to-median-income ratios historically high, they’re particularly so for younger folks. Moreover, I suspect that increase is driven by both a faster-than-usual rising numerator (rents) and much slower-than-usual growth in the denominator (median income).
All of which translates into slower investment, slower growth, a more sluggish recovery, and probably some unpleasant fights about cleaning up the kitchen. The good news is that the share of kids living at home has plateaued and the residential investment share of GDP is clearly trending up. But it’s been a real slog and I don’t see that changing quickly.