America sqeezes its youth

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By Leith van Onselen

The September issue of the Atlantic contains an interesting article lamenting how America’s Generation Y (“the Millennials”) are shunning big ticket purchases, such as new cars and housing. The article raises a bunch of possible reasons for this phenomenon. But one reason, more than any other, is to blame in my view: Generation Y is financially insecure:

Millennials… are… sharing transportation: they’re also sharing living quarters, albeit begrudgingly, and with less gee-whiz technology involved. According to Harvard University’s Joint Center for Housing Studies, between 2006 and 2011, the homeownership rate among adults younger than 35 fell by 12 percent, and nearly 2 million more of them—the equivalent of Houston’s population—were living with their parents, as a result of the recession. The ownership society has been overrun by renters and squatters.

Nine out of 10 Millennials say they eventually want a place they own, according to a recent Fannie Mae survey. But this generation’s path to home­ownership is fraught with obstacles: low pay, low savings, tighter lending standards from banks. Student debt—some $1 trillion in total—stalks many potential buyers as they seek a mortgage (or a car loan). At a minimum, homeownership rates are highly unlikely to soon return to the peaks they hit during the housing bubble.

The destruction of America’s middle-class is widely accepted and captured beautifully by the below chart also from the Atlantic:

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In the 60 years after World War II, the United States built the world’s greatest middle class economy, then unbuilt it…

In the immediate postwar period, America’s rapid growth favored the middle and lower classes. The poorest fifth of all households, in fact, fared best. Then, in the 1970s, amid two oil crises and awful inflation, things ground to a halt. The country backed off the postwar, center-left consensus — captured by Richard Nixon’s comment that “we’re all Keynesians now” — and tried Reaganism instead. We cut taxes. Technology and competition from abroad started whittling away at blue collar jobs and pay. The stock market took off. And so when growth returned, it favored the investment class — the top 20 percent, and especially the top 5 percent (and, though it’s not on this chart, the top 1 percent more than anybody)…

And then it all fell apart. The aughts were a lost decade for families, and it’s not clear how much better they’ll fare in the next.

And the pain has fallen disproportionately on America’s youth, which is losing employment share to the baby boomers. From John Mauldin:

The blue line is the employment level of those 55 years of age and older (scale on the left), and the red line is the employment level of all workers (scale on the right… Note that the number of employed 55 and over has risen more or less steadily since before the beginning of the Great Recession, growing by over 4 million, while the number of jobs for all workers has dropped by 8 million and is still down by over 4 million….

While the unemployment rate is fairly low and even for those 35 and older, younger workers are suffering more… Just as employment went from the farm to the city, it now seems to be undergoing a new transition.

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America’s Generation Y will continue to shun big ticket purchases as long as they are saddled with student debts and their employment situation remains precarious.

Twitter: Leith van Onselen. Leith is the Chief Economist of Macro Investor, Australia’s independent investment newsletter covering trades, stocks, property and yield. Click for a free 21 day trial.

About the author
Leith van Onselen is Chief Economist at the MB Fund and MB Super. He is also a co-founder of MacroBusiness. Leith has previously worked at the Australian Treasury, Victorian Treasury and Goldman Sachs.